A rise in IT stocks, on their better-than-expected results, has helped prop up Sensex. But don’t expect an overall jump in earnings of India Inc just yet
As on Thursday, only 28 companies out of the BSE 500 companies had announced their results for the quarter ended September 2013. Their overall performance shows a healthy growth both in revenues and profit. The aggregate net sales of the 28 companies for the quarter rose by 15.9 per cent over the same quarter last year and profits rose by 16.8 per cent, indicating a strong performance by India Inc, but market experts say that it is just an early trend and since there has been no broadbased recovery in the economy, the trend may not remain the same as more companies come forward to announce their results for the quarter.
A closer look at the list of the 28 companies that have announced their result shows that there are six IT companies whose aggregate revenues rose by 19 per cent and profits by 25 per cent on a year-on-year basis. This was primarily driven by volume growth that the Indian IT industry saw with revival of growth in the US economy and was also pushed by a sharp depreciation in rupee during the quarter.
Also, since profits announced by the six IT companies amounting to Rs 8,589 crore account for 42 per cent of the total profits of 20,105.6 crore shown by the 28 companies, a strong performance from the IT sector has polarised the aggregate performance as of now.
“There is no broadbased recovery and the overall growth in earnings is polarised because of better-than-expected performance by IT companies. Not only have top IT companies delivered but even tier II companies have shown good numbers,” said Pankaj Pandey, head of research at ICICIdirect.
If we remove the six IT companies from the list, the net sales growth still stands tall at 15 per cent but there is a sharp dip in the aggregate profit growth from 16.8 per cent to 11.1 per cent.
The Results so far
Other than IT majors such as TCS and Infosys, there have been other major companies that have announced their results for the quarter. Reliance Industries announced its revenue at over Rs 1,00,000 crore witnessing a year-on-year growth of 14.9 per cent for the quarter. Banking majors such as HDFC Bank and Axis Bank too announced their results and their year-on-year growth in income and profits is lower than what it registered in September 2012 over the previous year.
While HDFC Bank’s income rose 29.1 per cent in September 2012 over September 2011, the growth in September 2013 slowed to 16.4 per cent.
The bank also saw its profit growth at below 30 per cent for the first time in 10 years.
Even for Axis bank the income growth softened to 13.8 per cent this quarter from 26.7 per cent in September 2012 over September 2011 and the profit growth stood at 21.3 per cent as against a growth of 22.1 per cent in September 2012..
The 28 companies also saw a rise of 13.1 per cent in their interest expenditure for the quarter as it rose from Rs 12,812 crore in September 2012 to Rs 14,487 crore in the last quarter.
Why the trend may not sustain
While the numbers may remain better than what they were in previous quarters, it may not remain as good as they seem now. All major IT companies have announced their results with the exception of Wipro, Mahindra Satyam and a few others. So benefit from the sector may be limited now for the overall market. Even though major pharma companies are yet to come out with their results and they are expected to post strong numbers benefitting from a depreciated rupee, other sectors may play a spoiler.
Market experts point out that FMCG companies may not come out with good numbers as their volume growth is expected to remain soft and while both public and private sector banks are likely to show weak numbers they may also show pressure on asset quality. Even the infrastructure, construction and oil & gas companies may not show strong growth.
While the two leading private sector banks have not posted very good result, experts point that the public sector banks are also expected to come out with not very strong numbers.
“There will be pressure on the asset quality and strong treasury gains that the banks had registered in the previous quarter may not be there for the banks this time,” said a fund manager who did not wish to be named.
Larsen & Toubro announced a 10 per cent rise in its net sales at Rs 14,509 crore and 7 per cent rise in its net profit at Rs 977 crore for the quarter ended September 2013 (excluding exceptional gains that were registered in the same quarter last year). While the numbers were better than market expectations, they still will end up pulling down the aggregate growth numbers posted by the 28 companies.
Projections by Brokerage houses
Even projections by brokerage houses for this quarter performance shows that the growth shown by the 28 companies may not be maintainable as more and more companies announce their result. Edelweiss projected a revenue growth of 11.8 per cent for 174 companies that it covers (does not include oil marketing companies) and a net profit growth of 4.4 per cent.
For the Sensex companies (excluding oil marketing companies), the revenue and profit growth has been projected at 12.4 and 6.6 per cent. The report pointed out that numbers are better than those seen in previous quarter and is on the back of better numbers from the IT and pharma sector.
Prabhudas Liladhar too projected a revenue growth of 10.4 per cent for Nifty companies (excluding oil and gas) and a growth of 5.3 per cent in profits for them.
Edelweiss report said that the entire benefit of topline improvement will not flow to the bottomline because of rise in input costs and interest payments increase. It further noted that banks and infrastructure companies may disappoint on numbers for the quarter.
“Owing to spike in wholesale rates and rise in bond yields, PAT of banks is expected to decline due to investment depreciation on G-Secs and lower treasury profits. Also, infrastructure related sectors viz., cement, construction and capital goods, are expected to post negative topline growth and their PAT (profit after tax) is estimated to plummet between 20 and 80 per cent year-on-year,” said the report.
Why are markets rising?
As the results for the quarter ended September 2013 continue to trickle in, stock markets have held themselves. And on Friday, the benchmark Sensex at the Bombay Stock Exchange witnessed a strong rally of 2.3 per cent or 467 points to close at a near three-year high of 20,882.9.
IT stocks have a weightage of 18 per cent in the Sensex and a rise in IT stocks over the last few days have certainly had an impact on the overall gains in Sensex.
“Several factors are working. While IT performance is having its impact, the banking sector has also gained with improvement in liquidity conditions. Also postponement of tapering of quantitative easing programme by US has also helped the market,” said Pandey.
So do not trade in the market in anticipation of an overall jump in earnings of India Inc. They may be better but there is still some time before a revision can happen.