Exports drive earnings for another quarter

Corporate India’s earnings in the quarter ended December were largely in line with Street expectations but the overall performance looked similar to that in the previous quarter -- export-driven sectors like information technology and pharmacheuticals again stole the show.

While revenue of 3,253 companies grew 10 per cent, a large part of this growth came from export-dominated sectors.

According to analysts led by Espirito Santo Securities’ Mukul Kochhar, this is a second straight quarter of reasonable sales growth for the market.

A decent acceleration in the export-driven portion of the economy is offsetting a continued deceleration in investment.

Sales in the investment economy (industrials, cement, infrastructure) continues to decline following a prior fall in orders.

Among the top 10 sectors in terms of revenue growth, data show, mining and minerals, IT and pharma exhibited a topline growth ranging 19-75 per cent.

Given a 15 per cent year-on-year decline of the rupee against the dollar, export-driven companies got a boost.

IT and pharma were also among the top five most profitable sectors in absolute terms and accounted for 26 per cent of overall profits.

Sonam Udasi, head of research, IDBI Capital, says: “The December quarter has been even more dominant in outperformance of the IT and pharma sectors.”

Two other important sectors, automobile and power generation, also led on profit growth, expanding about 80 per cent on a year-on-year basis.

Heavyweight sectors like automobile, steel and telecommmunications showed revenue growth rates in excess of 12.5 per cent.

While auto and steel sectors were driven by growth in foreign markets and a favourable currency value, the telecom sector benefited from pricing gains.

While non-ferrous companies were helped by the rupee’s depreciation, leading to better realisations, weak local demand limited their gains.

For the BSE Sensex, automobiles, pharmaceuticals and utilities exceeded analyst expectations on net profit growth, while telecom disappointed.

Public-sector oil marketing companies IOC, BPCL and HPCL reported losses and were a drag on overall performance.

The three reported a combined net loss of Rs 3,784 crore (Rs 37.84 billion) due to factors like lower Budgetary support towards underrecoveries and lower gross refining margins.

These companies had posted a net profit of Rs 5,127 crore (Rs 51.27 billion) in the year-ago period.

Analysts were expecting these firms to report a profit in the December quarter.

If these three are excluded from the sample of 3,253 companies, the combined profit growth of the rest would be higher by about 950 basis points.

In contrast, ONGC did well with a 28 per cent rise in profits.

However, that wasn’t enough to offset the fall in OMCs’ profits.

Public-sector banks like State Bank of India and Punjab National Bank (part of the Nifty companies) also reported declines in net profit -- by 39 per cent and 42 per cent, respectively, to Rs 2,839 crore and Rs 755 crore.

Among the top performers, Tata Motors again churned in a good show, led by strong numbers posted by JLR, the company's British subsidiary.

JLR's quarterly profit stood at about £620 million, compared with expectations of 430-450 million pounds, as operating profit margins expanded.

Sun Pharma, too, surprised the Street with better-than-expected numbers. These were driven by Taro and its US business.

The company also raised its growth guidance for 2013-14.

Among other heavyweights, Tata Steel reported a profit of about Rs 500 crore (Rs 5 billion), compared to a net loss of Rs 760 crore (Rs 7.6 billion) last year, led by good operational performance at its European and Indian arms.

Sesa Sterlite's profits jumped sharply, by 275 per cent, to Rs 1,868 crore (Rs 18.68 billion) as a result of a restructuring of Sterlite Industries.

On the domestic front, however, the pain continued. Excluding oil & gas and banking & financial services, revenue growth fell 80 basis points on a sequential basis -- from 12.3 per cent in the September quarter to 11.5 per cent in the December quarter.

Given that the retail inflation rate is at 10.37 per cent, volumes continue to be sluggish.

Sanjeev Prasad, executive director and co-head, Kotak Institutional Equities, says: "Volume growth across sectors decelerated and non-performing loans remained high in the December quarter, reflecting a slowdown in the Indian economy."

Domestic demand continued to be weak and was reflected in FMCG companies' numbers.

"So far, these companies have been able to pass on the cost by adjusting the volume-price mix. If demand doesn't pick up, they will have no choice but to absorb the costs. That will impact margins going ahead," says Udasi.

So far, these companies have been able to keep their advertising costs within the 7.5 per cent to 9.5 per cent band. While bigger players like Hindustan Unilever continued to see single-digit volume growth rate, some like Dabur, Marico and Godrej were helped by a significant overseas presence and exports.

Among the larger sectors in the domestic space, capital goods, cement and construction disappointed and showed a decline in sales.

Due to a weak economy and subsequent demand destruction, cement companies are running at 70 per cent capacity utilisation -- much below the peak level.

Going ahead, analysts believe the two big sectors, IT and pharma, to continue to do well because of demand drivers, especially as the US market continues to be strong.

Even in constant currency terms, IT companies have delivered a three-four per cent growth on a sequential basis.

Analysts at Kotak Institutional Equities expect Sensex earnings per share to grow 10 per cent and 15.6 per cent for 2013-14 and 2014-15, respectively.

On the currency front, economists like Deutsche Bank's Taimur Baig maintain the rupee will trade in the broad range of 61-65 a dollar, with the likelihood of the Indian currency drifting toward the lower end of the band in the second half of the year, assuming no negative fallout of the upcoming general elections in April-May.