As the earnings season gained momentum there was jubilation among analysts and fund managers. And it was not hard to see why. After all, the financial results announced by most Indian companies outstripped analyst expectations. Whether it was IT, automobiles, cement or FMCG, the overall trend was better than expected.
Results of 600-odd companies, that were declared at the time of going to press, showed that on an average net profit had increased by 13.5 per cent for the June quarter over the same quarter of the previous year, while the top line was almost flat. The bigger surprise was the jump in the bottom line by almost 18 per cent over the March 2009 quarter.
“The results are a clear indication of the strong underlying consumption demand, particularly in rural India,” says Apurva Shah, Head, Research, Prabhudas Lilladher. Analysts attribute this to measures like the farm loan waiver, National Rural Employment Guarantee Scheme, increase in the minimum support price and higher salaries for government employees—all of which have put more money in the hands of the consumer. The big growth came from consumption-led sectors—seen from the sharp growth in net profit for companies such as Hero Honda and Maruti Suzuki.
Another factor for the improved profitability was cost reduction. “Cost efficiencies have contributed significantly to EBITDA (operating profit) growth,” says Vikram Kotak, Chief Investment Officer, Birla Sun Life Insurance. A quick analysis by BT shows that the operating profit for the surveyed 600 companies increased by 17.5 per cent over last June, while it was up 7.6 per cent from the March quarter. IT industry, in particular, was a big beneficiary of costcutting measures.
Expenses, too, came down due to a fall in raw material prices and cut in salaries. Though the interest cost continued to remain high, the improvement over the March quarter was clearly visible. Most companies kept their focus on profitability rather than on revenue growth. This could be attributed to the fall in prices of commodities like steel, coal, crude and iron ore, which led to a fall in the top line of companies in these sectors.
Not everyone did equally well, though. Weak investment demand meant that capital goods, engineering and metal companies disappointed. This is an outcome, analysts say, of most industrial companies still focussing on improving utilisation of existing capacities rather than planning fresh capital expenditure.
Says Ashok Jainani, Head, Research, Khandwala Securities: “The marginal improved volume growth of these sectors is on account of large order backlog and improved execution by some of the large players”. L&T, for instance, reported that new orders in the quarter fell more than a fifth and expected demand to remain slow for at least another quarter. There were other reasons for the continued slowdown in capex. “Banks have also become risk-averse and are not lending freely due to the slowdown. This means that the cost of funds remains high,” says Hitesh Agrawal, Head, Research, Angel Broking.
By and large, though, the first quarter, analysts say, has set the tone for fiscal year 2010. The situation is expected to improve from the second-half as government stimulus packages continue to spur demand. “The first quarter has started on a remarkable note. We see reasonable upgrades in current year and substantial upgrades in next year (fiscal 2011) earnings,” says Kotak of Birla Sun Life.