Sunday, July 6, 2008

Q1 results: Analysts hopeful, companies cautious

Q1 results: Analysts hopeful, companies cautious
Few earnings seasons are awaited with such trepidation as the one for the June 2008 quarter. With the markets in turmoil, the Street is looking to India Inc to bail it out.

But expectations have never been more tempered; if analysts' estimates between 2004 and 2007 were often less flattering than what companies turned in, with constant upgrades becoming the norm, they are far more cautious today, taking care to pencil in even the smallest risk.

"The June quarter numbers should be reasonably good with earnings growing at around 15 per cent for the corporate sector as a whole because there was some momentum," said Rashesh Shah, chairman, Edelweiss Securities.

That would, however, be well below the 20-25 per cent growth seen over the past few years.

But then, the environment is becoming far more difficult because of high inflation and interest rates. Demand for products like cars and two-wheelers and even some consumer durables is flagging and even if companies are able to push volumes they don't always get the best price.

This means growth in revenues could well turn out to be lower than the previous quarters: a Morgan Stanley report forecasts that revenues, for a sample of 104 companies (excluding energy), could rise just 21 per cent in Q1FY09.

What's more, high commodity prices continue to push up costs for manufacturers, so a compression in operating margins cannot be ruled out - for the same sample, operating margins are likely to come off by about 50 basis points. Even in the March 2008 quarter, there were just a handful of companies in the top 100 that posted an increase in margins.

In addition, higher interest and depreciation costs are likely to eat into net profits even as companies earn less from other income - the growth in net profits is expected to be just 11 per cent for the June 2008 quarter compared with 25 per cent for the March 2008 quarter.

While advance tax collections may not be the best indicator of profits to come, the thought that they have risen at 32 per cent for the top 50 corporations against 38 per cent last year is not comforting.

The pace of credit growth is also moderating, though Paresh Sukthankar, executive director, HDFC Bank [Get Quote], said the latest credit growth numbers put out by the central bank of around 25 per cent suggest that demand for money has been reasonably good. "On average, banks should have been able to lend at around these levels," he said.

But the mood certainly isn't upbeat. "The mood is clearly worsening and we may well see a round of downtrading," said Hoshedar Press, executive director and president, Godrej Consumer Products [Get Quote].

Press said it's hard to pass on prices at the lower end and growth in some categories has been affected.

N Seshagiri Rao, Director, Finance, at JSW Steel [Get Quote], said steel has been selling well with capital goods and engineering driving demand. "The industry should certainly see far better volumes of at least 10-12 per cent than it did in the corresponding period of the previous year," he noted.

However, with domestic prices lower than global ones, realisations may not be encouraging, he pointed out. Margins are expected to contract most for sectors like engineering, cement, metals, construction and consumer staples thanks to rising input costs.

They could stay flat or slip marginally for technology firms since revenue growth is expected to be 8-9 per cent sequentially. Banks will take a hit on the investment portfolio and, with borrowing costs having risen, net interest margins could at best remain stable.

Telecom operators should do fairly well given the good growth in talk-time volumes as should healthcare firms that will gain from the depreciating rupee. Sectors such as retail and media may not give investors much to cheer about.

Some experts, however, are still optimistic. Said Nilesh Shah, deputy managing director, ICICI [Get Quote] Prudential AMC, "The results should be satisfactory. In fact, going by the advance tax collections, there could be some surprises."


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