India Inc has yet again pleasantly surprised investors with commendable results for the quarter ended December 2006, leading to renewed buying interest. Buoyed by the healthy earnings scorecard, the bellwether indices Sensex and Nifty have scaled new highs. Corporate India's sales for Q3 grew about 27 per cent while net profits increased about 67 per cent on a year-on-year basis (including the "other income" component, which was up 28 per cent). On a sustainable basis, however, the operating profit for the quarter increased by about 48 per cent. Rising interest costs (31 per cent higher) are a source of concern. A total of 2,140 companies have announced their earnings so far.
Impressive numbers from cement companies, private banks, infrastructure, steel and non-ferrous metals, apart from the usual high-performers, such as information technology and telecom service providers, underpinned strong profit growth. Sugar and automobiles, on the contrary, posted lacklustre numbers.
Here is a brief overview of the results of various companies, on a sectoral basis:
Cement companies firm up: Cement companies once again came up with impressive numbers, registering a 270 per cent increase in net profits over the quarter. Robust sales volumes and better realisations have driven an overall increase in the operating profit margins for the majors. Helped by a consolidation of ACEL (Ambuja Cement Eastern) as well as healthy realisations and despatches, Gujarat Ambuja Cements reported earnings of Rs 337 crore, 284 per cent higher, while India Cements outperformed expectations by posting a sharp turnaround in profitability. Higher prices and better operating margins, in general, pushed up earnings' growth for Ultra Tech Cement, Prism Cements and Shree Cements.
Banks, a mixed bag: Continuing the previous quarter's trend, private banks outperformed their public sector counterparts in profit growth. While the average net profits of public sector banks increased 16 per cent over the previous year, private banks notched up about 37 per cent growth. A bigger deposits base and higher fee-based income helped sustain the growth rates of private sector banks.
ICICI Bank reported a 42 per cent rise in net profit for the third quarter on the back of higher interest income, coupled with a rise in fee-based income. A robust rise in net interest income (the interest earned on loans minus that paid for funds) bodes well for HDFC Bank, which recorded 32 per cent higher net profits for the third quarter. Bank of Rajasthan, ING Vysya Bank and Dhanalakshmi Bank doubled their earnings. State Bank of India, however, saw its net profits fall about 4.5 per cent as a result of higher provisioning and rising costs.
Infrastructure/realty grows: Infrastructure/realty companies sustained their stellar earnings growth with 56 per cent higher revenues and a 257 per cent increase in net profit.
Leading the pack, Unitech registered a staggering 3,190 per cent increase in earnings as several of its ongoing residential projects were completed and booked over the quarter. Its operating margins stood at 69 per cent, against 13 per cent the previous year.
Other companies that scored high were Valecha Engineering, Prajay Engineers and Noida Toll Bridge. Higher volumes and, hence, better operating margins, could have contributed to the sector's strong showing.
Metals strike: While the growth in volumes for players in non-ferrous metals was healthy, better realisations contributed to their earnings' growth. Hindalco reported a 91 per cent increase in earnings on the back of a 62 per cent volume growth. Its operating margins grew about 216 percentage points during the period. Madras Aluminium recorded a 300 per cent increase in net profits on the back of robust revenue growth and 1,612 percentage points increase in operating margins.
Buoyed by higher metal prices, steel companies too put up a decent performance last quarter. SAIL reported a 54 per cent increase in earnings on a yearly basis. Higher volume growth and an 800-percentage point increase in operating margins boosted performance. Tata Steel, helped by a 21 per cent sales growth, reported a 35 per cent increase in earnings. Usha Martin, Jindal Stainless and Man Industries recorded over 130 per cent increase in net profits.
Software — surprises from smaller firms: Results of software companies were mixed, as the quarter is seasonally a quiet one for the sector, with a lower number of billing days. An appreciation in the rupee also had an impact on overall earnings.
Software majors Infosys Technologies, Wipro, TCS and Satyam Computers turned in numbers that ranged from `in-line with expectations' to `better-than-expected'. It was the mid-sized firms that turned up most of the surprises this quarter. Polaris Software, reporting a sharp turnaround in profitability, caught the market by surprise.
Some of the small- to medium-sized companies, such as KLG Systel, Silverline Technologies, Four Soft and Tele Data Informatics, more than doubled earnings during the quarter. IOL Broadband and Ramco Systems, bucking the trend, registered losses during the period.
Telecom buzzes with action: Continuous growth in the subscriber base provided the necessary impetus for telecom service providers, which turned in a solid performance during the third quarter.
Bharti Airtel reported an increase of 61 per cent in net revenues YoY on the back of a 41 per cent operating profit margin (a 550 percentage point increase). VSNL recorded a 5 per cent decrease in net profit for the quarter on a YoY basis because of lacklustre sales and operating margins. Tata Tele-Services (Maharashtra) reported losses for the quarter.
Autos in neutral gear: Despite strong growth in the top-line, the third-quarter results of auto companies are a mixed bag, as players became vulnerable to margin pressures from rising input costs. Two-wheeler companies Hero Honda and TVS Motors reported a decline in profits on the back of a rise in raw material costs. Ashok Leyland, thanks to a significant growth in volumes, reported a 93 per cent increase in earnings. Tata Motors and Maruti Udyog registered a near 11 per cent increase in net profit during the quarter.
However, Maruti's operating margins dipped by 119 percentage points during the period.
Sugar turns bitter: The December quarter usually captures the start of the crushing season for sugar companies. However, lower sugar prices, on expectations of a bumper output this year, resulted in sharp profit declines for most companies, marking a reversal of the past two years' trend.
While the revenues of Thiru Arooran Sugars, Dwarikesh Sugar and Rajshree Sugar rose more than 50 per cent, the earnings were lacklustre. Though volume growth for sugar companies remained healthy given higher cane availability, lower realisations weighed heavily on the profitability.
Divergence in numbers
Though the big picture showing the earnings performance of India Inc in the third quarter is impressive, a sectoral breakdown of the numbers reveals a significant divergence.
Better-than-expected earnings growth in sectors such as infrastructure/realty, telecom and cement made up for the lacklustre performance in the auto, sugar and certain other heavyweight sectors.
Strong topline growth across sectors suggests that demand and consumption drivers are still in place, amid margin pressures in select businesses.
The stock market rally of the past six months has been quite narrow, focussing on a few sectors and stocks seen to have impressive growth prospects; if the earnings scorecard is anything to go by, these trends will only continue.