Almost every major corporate which announced results for the three months to December 2010, last week, turned in numbers that were below the Street?s expectations.
The disappointments were many; Bharti Airtel?s net profits crashed 41% year-on-year, weak realisations drove down Ambuja Cement?s operating profit margin (opm) by 700 basis points year-on-year while a higher raw materials bill dented Hero Honda?s operating profits by 16% year-on-year. That apart, a tough environment dragged down Voltas?s net profit by 17% year-on-year while Tata Global Beverages adjusted net profits plunged 25% with the company unable to pass on the higher cost of inputs. In the previous week, Maruti Suzuki belied expectations as its opm failed to make it to the double digit mark, thanks to an unfavourable product mix.
Although the complete picture will unfold only after heavyweights like Tata Steel, Tata Motors and the oil majors report their numbers later this month, what?s come in so far isn?t quite exciting. For a universe of 1615 companies (excluding banks and financials), revenues in the three months to December 2010 have risen 22% year-on-year. That?s a reasonably good performance even if it is slightly lower than the top-line growth of 23.6% seen in the September 2010 quarter. A steeper rise in expenditure though has meant that operating margins in the December quarter have come off by about 110 basis points year-on-year. That has left net profits, for the sample, higher by just 12%.
Says Sanjeev Prasad, head of research at Kotak Institutional Equities, ?It?s true that results of some of the larger companies have come in below our estimates. For sure, earnings growth is going to moderate.? Adds Rakesh Arora, head of research at Macquarie Securities, ?We were expecting bad numbers from the cement firms and some of the auto companies. But the results were worse than we thought.?
Going ahead Arora expects a further moderation in earnings with inflation running high, which he thinks may spike raw material costs.
As Nandan Chakraborty, MD, Institutional Research at Enam Securities, points out the sectors that have been worst hit are engineering and FMCG which have been hit by rising input costs. ?Earnings for the broad market could moderate going ahead unless the capex cycle picks up,? observes Chakraborty.
The number of misses outnumbered the hits last week; Sun Pharma?s net profit, for instance was 16% below estimates though this was due to several one-off items. The other big miss was Nalco, whose operating profits and net profits came in 32% and 35% respectively below estimates because of higher than expected raw materials and other costs.
Analysts have started downgrading earnings estimates. Citi points out that Jaiprakash Industries? recurring profit after tax fell 26% year-on-year in the December 2010 quarter; consequently it has pencilled in an earnings cut of between 10-26% over FY11-13. Slower execution of orders at Bharat Electronics pulled down net profits (before exceptionals) by 24% in the three months to December 2010, way below analysts’ estimates. Although the management expects order inflows of around Rs 4,000-5,000 crore in the March 2011 quarter, analysts have downgraded earnings estimates for both 2010-11 and 2011-12. A couple of managements too have turned cautious. At Crompton Greaves the management has lowered its stand-alone revenue guidance for the current year; consolidated revenues at the engineering firm grew 7% year-on-year in the December quarter.