The environment continues to be challenging, says the management at Larsen and Toubro; that is evident from the minuscule 3.5% y-o-y rise in net profits for the three months to December 2011, posted by a clutch of 182 companies (excluding banks and financials). Even a couple of quarters ago, the profit number was far more robust at 21% y-o-y.
To be sure the data is skewed, in some measure, by the presence of a Reliance Industries (RIL), where profits fell nearly 14% y-o-y or a JSW Steel, where forex losses have hit the bottom line badly. But even otherwise, it?s clear that India Inc is under duress. That?s despite the fact that the top line has grown 30% plus, a good part of that being the result of inflation. The high cost of inputs as also wages continues to dent operating margins, which were down a steep 400 bps y-o-y, the ratio of raw materials to sales at a hefty 500 bps. Also other income has helped boost bottomlines; for the sample, it was higher by 88% y-o-y with companies like RIL, and ITC seeing a big increase. The problems seems to lie primarily in the core sector spaces ?oil&gas and metals. At Hindustan Zinc, for instance, operating profits fell 7% y-o-y, Sterlite?s numbers were very ordinary with pre-tax profits fairly flat while JSW Steel has been hurt by the disruption in supplies of iron ore. So far consumer companies appear to have held up reasonably well with Godrej Consumer having reported a 20% y-o-y increase in sales in the home market. It?s true Asian Paints may be finding it hard to push through volumes?estimated to have risen around just 5% in Q3 FY12?but volumes are growing even though the company has taken so many price hikes.
Indeed, the fact that loan growth at both HDFC and HDFC Bank have been 20% plus indicates that consumer confidence hasn?t dipped too much. Of course, smaller companies like Exide have seen profits come off 16% y-o-y while Zee?s advertising revenues, from the entertainment business, are estimated to have dropped some 10% y-o-y, resulting in 12% y-o-y drop in ebit.
With the Sensex having run up some 9% in the first three weeks of January and some stocks having gained even more, valuations are now richer than they were even a month back. So with the environment likely to remain tough for some more time, it?s possible analysts will downgrade earnings.
For instance, although JSW Steel is holding up well,despite the shortage of key resources, valuations at this point have turned a tad expensive given that the higher cost of inputs will hurt profitability and other metrics. Again, volumes at Ultratech Cement were up just 4% y-o-y with the top line boosted by better realisations, and the Street is concerned that the higher cost of imported and local coal and also increased freight could hurt margins. This together with muted outlook for demand has prompted downgrades in the counter. Number could be pruned for companies like Asian Paints, Hero Motocorp and Bajaj Auto. Ultratech Cement has already been downgraded while revenues and earnings estimates for Oberoi Realty have been trimmed.
The target price for Jet Airways has been scaled back to R320 from R500 earlier after the company disappointed analysts, thanks to a relatively weak performance overseas. While earnings estimates aren?t expected to be trimmed too sharply, it would nonetheless make the markets much more expensive. The good news is the smart rise in L&T?s order book, which jumped 28% y-o-y inQ3FY12. Hopefully, the rest of the earnings season will give us something more to cheer about.