After five quarters of contraction, sales growth for companies other than oil and financials turned positive in fourth quarter of the financial year 2015-16 to 5.6 per cent for Sensex and Nifty companies, according to Emkay Global Financial Services.
Recovery in sales is attributable to higher commodity prices, weak rupee, higher government spending and lower base. Earnings growth for Sensex and Nifty companies also rebounded to 22.5 per cent and 23.2 per cent respectively. Operating profit margin for Sensex and Nifty companies rose sharply by 287 basis points and 259 basis points, respectively, due to better sales growth and lagged impact of lower raw material cost.
According to the brokerage house, despite sharp increase in tax outflow (26.1 per cent and 11.6 per cent) and decline in other income (-12.3 per cent and 1.6 per cent) for Sensex and Nifty companies respectively, the profit growth improved substantially. Automobiles, agri input and chemicals and media & entertainment sectors performed strongly in terms of adjusted PAT while infrastructure related sectors such as engineering and capital goods and metals & mining continued to be a drag.
On the growth prospects, Emkay believes the recent pickup in international commodity prices as well as latent depreciation in the currency will reinforce recovery in sales and inflationary scenario. The brokerage house expects sales growth to be higher in the ongoing financial year ended March 2017 especially from the consumption-oriented sectors while margins might come under pressure with rising commodity prices.
It further added that rising prospects of rural demand from renewed focus of government on rural expenditure and normal monsoon is likely to shift the focus of the consumption-oriented companies towards rural economy. Additionally, slackened private investment activity coupled with lower government capital expenditure is likely to prolong the subdued scenario for capital goods sector in FY17.
For the next few quarters, Emkay is bullish on Pidilite Industries and Britannia in consumer space and Tech Mahindra and NIIT Technologies in the IT space. The brokerage house is also bullish on DCM Shriram, Coromandel in the agri-inputs and chemicals space and Tata Motors and Eicher Motors in automobiles sector. For other investment options from Emkay Global see table: