Auto, IT, pharma help paint rosy Q3 picture

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The December quarter has proven to be a bumper one for India Inc with profit growth surging to a nine quarter high of 28% from the year ago.

While this sounds encouraging, investors are however advised to observe caution while placing their bets on aggressive earnings expectations in the future as the current phase of growth is not secular across sectors.

The ET Intelligence Group's analysis reveals that the rapid acceleration is attributable to a handful companies from sectors, including automobiles, fast-moving consumer goods (FMCG), information technology (IT) and pharmaceuticals. Core sectors of the economy such as capital goods, cement, chemicals, construction, and real estate, on the other hand, continued to report depressed numbers.



For a sample of 2,000 companies that declared results for the December 2013 quarter excluding banks, financial companies, and oil and gas players, sales grew 12.5% from the year ago. It closely followed the 14% growth seen during the previous quarter. Operating margin touched 17% once again after a gap of nine quarters.

That rosy picture is however not that rosy when sector trends are considered. The analysis shows that the four sectors — automobiles, FMCG, IT, and pharma — have been dominating the current growth trend. The share of these sectors together has increased to 32% in the aggregate net sales of the sample from 24% three years ago. Their share in net profit has doubled to a surprisingly high 61% during the period.

It means these four sectors now contribute one out of every three rupees of India Inc's revenue compared with the contribution of one out of four rupees three years ago. Also, these sectors now earn nearly two out of every three rupees of the aggregate net profit compared with the contribution of one out of three rupees 36 months ago.

"IT companies have largely delivered an in-line set of numbers with decent volume growth in view of a seasonally soft quarter for the sector. Pharma companies have reported a good set of results," said Lalit Thakkar, MD, institution, Angel Broking. But core concerns in the economy such as elevated levels of non-performing assets of banks still persist, he added.

The IT and pharma sectors were beneficiaries of higher export demand and year-on-year depreciation of 13-17% in the rupee against the dollar, the euro, and the pound. The 153 IT companies in the sample posted a 22% year-on-year growth in aggregate sales and a 45% jump in net profit. The 108 pharma companies nearly trebled their net profit from the year ago with a 20% increase in sales helped by the robust performance of Sun Pharma and Dr. Reddy's Laboratories.

For the FMCG sector, aggregate net profit grew 22% from the year ago, the highest in six quarters led by the impressive performance of Hindustan Unilever. This is despite tapering volume growth, which shows that companies have been relying on cost rationalisation at a time when top line growth is in low double digits of around 13%.

Driven by the solid profit growth of Maruti Suzuki and Tata Motors, the auto sector reported a 74% jump in net profit. Cost controls and the tapering proportion of imported parts helped Maruti while strong demand for Jaguar Land Rover more than offset the operating loss in the domestic business of Tata Motors.

While these four sectors are carrying the flag for India Inc, core sectors continue to face depressed demand and lack of any major growth trigger. For 150 companies in the capital goods and related sectors, aggregate revenue fell 5% and net profit dropped 12%. Cement companies reported flat sales growth and a 35% decline in net profit.

The 57 construction companies reported losses at the aggregate level at a time when sales fell 5%. The aggregate profit of 46 companies involved in real estate slipped 30% while the top line dropped 9%.

While expectations stay low for the March quarter and FY14 as a whole, some analysts are pinning hopes on FY15. Rakesh Tarway, head of equity, Motilal Oswal Services, expects some earnings upgrades to take place for FY15 on hopes of a turnaround in performance.

Angel's Thakkar expects modest growth of 7.3% in earnings per share of the Sensex companies in FY14 but believes the pace will shoot forward to 17.9% in FY15. "During FY2015, we believe that a host of positives are likely to play out such as moderation in inflation, room for monetary policy easing, greater policy certainty post elections, substantial pick-up in the investment cycle, boost to export performance from recovery in advanced economies," said Thakkar.
 

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