Q3 results meet muted expectations as margin pressure appears to ease

Feb 16 2013, 14:23 IST
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Smaller declines in operating and net margins trigger Street’s hopes of recovery. (Reuters) Smaller declines in operating and net margins trigger Street’s hopes of recovery. (Reuters)
SummarySmaller declines in operating and net margins trigger Street’s hopes of recovery.

December quarter results of top blue chips repeated a decline in operating as well as net margins, albeit at a lower pace.

While such smaller declines may be reflecting the Street’s expectations that the margin recovery is around the corner, the y-o-y revenue growth of 38 Nifty companies, excluding financials and oil & gas companies, was the slowest in the last six quarters. Financials of Ranbaxy, which is expected to announce its results towards the end of February, were excluded from the analysis.

For the three months to December 2012, the operating margin of a set of 38 companies fell 59 basis points (bps) compared to the previous year, to 16.6%. On a sequential basis, however, it showed a marginal improvement of 31 bps.

The net profit margin, derived by comparing these companies reported net earnings to their total income, dipped 42 basis points to 9.7%. These declines, however, point to abating margin pressures, given that during the four quarters to June 2012, the average decline in both these margin benchmarks averaged more than 200 bps.

Analysts believe that the expectations from the December quarter numbers were not high and, to that extent, the results have met expectations. Even for topline or net sales, the consensus estimates were for 8-9% growth, which has come through. The total income also clocked in a y-o-y growth of 9% even after a strong 28% growth in the other income of these companies during the period.

“While the results are in line with expectations, after several quarters, these numbers are not expected to pull down forward earnings estimates,” said an analyst.

Rakesh Arora, MD & head of research, Macquarie capital securities, pegs an increase of 100 bps in the operating or Ebitda margins, adding about 8% to the earnings growth. “The market has a potential for upgrades as declining non-food inflation and interest rate cuts would add to earnings growth,” he added.

During the third quarter of the fiscal, after factoring in the the impact of stock purchases and finished good purchases, the total raw material cost of the universe, grew at about 8%, its lowest in at least six quarters.

Interest costs, however, continued to eat into the net profits as the same advanced by 29% against last year as compared to a 5% y-o-y growth in the quarter ending September 2012. In particular, intrest burden carried by companies like Reliance Infra, Tata Power, Jindal Steel & Power, Ultratech and Bharti Airtel expanded at higher rates compared to last year.

The latest results season begun on a positive note, with heavyweights like Infosys, Reliance Industries, ITC, L&T and Maruti Suzuki providing bright spots with their quarterly numbers. However, as it progressed, the momentum declined with results, including those of Hindustan Unilever, Bharti Airtel, Hero Motocorp and Reliance Infra, turning out to be major letdowns.

The last leg of quarterly results were a major disappointment as third quarter numbers of JSPL, Hindalco, Tata Steel, Tata Motors and DLF were below market expectations.

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