IT firms help India Inc bounce back from slowdown

The first flush of results for the quarter ended December 2013 suggests a revival in India Inc’s profitability, led by software services companies like Tata Consultancy Services, Infosys, Wipro and HCL Technologies. 

The combined net profit of 82 companies that have declared their earnings so far is up 20.2 per cent compared with the same period last year.

The topline growth, however, has been muted, at 14.7 per cent (down from 17.7 per cent year-on-year growth in the second quarter). This is largely on account of a poor show by manufacturing companies, which continue to bear the brunt of a demand slowdown in the domestic market.

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The quarter clearly belonged to information technology companies, with eight IT exporters reporting a combined 37 per cent y-o-y growth in net profit and 27 per cent net sales growth.

Their core operating margin (excluding the impact of other income), at 28 per cent of net sales, was at a three-year high - 60 basis points higher on a sequential basis and 170 basis points more when compared with the same period last year (100 basis points equal one percentage point).

The sample includes eight Sensex and nine Nifty 50 companies. Their profitability was aided by margin expansion, with companies reporting an 80-basis-point improvement in core operating margin (excluding other income) to 24.7 per cent of net sales in the third quarter, against 23.9 per cent the previous quarter. 

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The bottom line was also boosted by non-core income, such as treasury income and forex gains.

The total other income of these companies rose 20.2 per during in the October-December period, against near-flat growth in the previous quarter (see chart).

Reliance Industries was the biggest beneficiary on this account. The company reported 32.5 per cent growth in other income last quarter and its other income, which accounted for nearly a quarter of its total operating profit, helped it beat the Street expectations. 

IT companies, on the other hand, reported gains on their foreign-exchange transactions -TCS was able to triple its other income.

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“The results highlight the contrast between export demand and domestic demand. Export-led sectors like IT have benefitted from a weaker rupee and an economic recovery in North America and Europe, while companies in the manufacturing and industrial sectors continue to suffer from a demand slowdown in India,” says Nitin Jain, head (capital markets; individual clients group), Edelweiss Capital.

He expects this trend to continue for some time, given a continued momentum in exports and an economic recovery in developed countries.

The cheer, however, was missing in non-IT sectors, thanks to a continued slowdown in the domestic sector. Excluding the eight IT companies, the net profit growth for the sample declined to 11 per cent, while net sales growth fell to 11.3 per cent in the quarter.

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A slowdown in domestic demand was clearly visible in raw material costs, which rose nine per cent (for non-IT companies) over the same quarter last year, compared with 12.5 per cent the previous quarter.

The brighter side, however, was that even non-IT companies reported an improvement in margins on the back of a decline in raw material intensity and rise in labour productivity. Core operating margins for non-IT companies improved nearly 100 basis points over the previous quarter and 40 basis points over that in the year-ago period.

On the whole, the Street appears pleased with the result season so far.

"There has been no major disappointment and most large companies have either exceeded or met expectations," says Devang Mehta, senior vice-president & head of equity sales at Anand Rathi Financial Services.

But the cheer could die down once industrial and infrastructure companies declare their results in the latter part of this month or early next month, he adds.