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Corporate scorecard may be full of red marks

Source : BUSINESS_STANDARD
Last Updated: Sun, Apr 07, 2013 19:51 hrs
INDIAN STOCK BROKERS KEEP WATCH ON THE KEY SENSEX SHARE INDEX GRAPH IN BOMBAY.

If leading equity research houses' fourth-quarter results preview is any indication, corporate India might like to forget 2012-13 in a hurry. Analysts expect Sensex 30 companies' sales growth in the January-March quarter to fall to 5.6 per cent - the lowest in 14 quarters.

In the third quarter, the sales of the same set of firms had grown by 9.7 per cent year-on-year (YoY).



Slowing revenues are expected to curb earnings growth, too. Barring technology, consumer, pharmaceutical, utilities and financials, most sectors might see a sharp YoY contraction in earnings. Sectors like automobiles, cement, metals, industrials and oil & gas are expected to see a sharp drop in demand in the quarter. As a result, sales growth of these sectors could be below five per cent.

Edelweiss Securities says: "The deceleration in revenue growth is a red flag. We expect profit after tax of Sensex companies to decline 3.7 per cent YoY. The numbers appear all the more depressing in the light of one-off gains posted by Tata Motors, BHEL and ONGC in FY12." Excluding these companies, profit after tax of Sensex companies is estimated to be 8.3 per cent YoY.

The moderation in sales and earnings growth would become broad-based, experts said. Sectors that earlier held up well are also coming under pressure now. The revenue growth for fast-moving consumer goods (FMCG) companies is also expected to slow to 14 per cent, compared with the 20 per cent seen over the past few quarters. Antique Stock Broking estimates pharmaceutical sales to grow 10 per cent, information technology 21 per cent and financials seven per cent. The poor show in the fourth quarter will have a bearing on the market and sectors, as picking winners will become even more difficult.

Here's what to expect from sectors and companies:

THE BIGGEST LOSERS
Though the slowdown and weakness are more or less broad-based, there are some companies that will see a very dramatic contraction in sales and earnings. Antique expects auto, cement and industrials to see the steepest earnings decline in the fourth quarter. This is not surprising, as industrial production contracted through the year as demand contraction accelerated. The companies expected to see the biggest earnings drop are Hero, ACC, Ambuja, BHEL, SAIL, Hindalco, ONGC, Ranbaxy and Punjab National Bank. In FY12, Tata Motors, BHEL and ONGC had posted one-off gains and, therefore, their profitability would fall sharply on a YoY basis in FY13.

Some other brokerages have an even more drastic outlook on the performance of select companies. For instance, Bank of America-Merrill Lynch believes the headline profit growth of Sensex companies will not be more than one per cent on a consolidated basis, largely due to the weak performance of Tata Motors. Excluding Tata Motors, the benchmark's profit growth would be 13 per cent, says BofA-ML's Jyotivardhan Jaipuria.

Consensus estimates suggest the pack of Tata companies would post weak numbers and, thereby, drag the numbers for headline earnings down. According to Bloomberg's consensus estimates, Tata Motor's earnings per share (EPS) would decline 30 per cent YoY, while Tata Power's would contract 207 per cent and Tata Steel's 68.44 per cent.

SHRUNKEN T-20 CLUB
The last quarter of the financial year might see very few companies posting earnings growth of over 20 per cent. While most of the Tata pack is expected to do badly, Tata Consultancy Services is likely to post earnings growth of 34 per cent, according to Bloomberg's consensus estimates.

Edelweiss Securities expects Reliance Industries, Gail, TCS, Dr Reddy's and HDFC Bank to be the only Sensex companies to log in more than 20 per cent growth. However, there is no clear consensus on this, as BofA-ML expects Gail India, Tata Steel, Dr Reddy's, RIL and HDFC Bank to drag down growth of the benchmark's earnings.

MARGIN GROWTH FOR SOME, DESPITE SLOWING SALES
There is one silver lining, though. Thanks to a sharp correction in commodity prices, operating margins of companies in select sectors could expand. BofA-ML's Jaipuria expects aggregate operating margins of Sensex companies to expand 70 basis points YoY. However, this is no turnaround in profitability, as operating margins would see a 20 basis points decline after excluding the gains accrued through weak commodity prices. While metals and utilities might see margin expansion, sectors like consumer, retail, media, IT and hospitality will not see margin expansion, as material costs for these sectors are gone up.

FY14 DOWNGRADES TO CONTINUE
Until last week, few strategists were spelling it out, but after the fourth-quarter estimates, downgrades for FY14 seem inevitable. Broadly, the market was earlier expecting an earnings growth of 12-14 per cent for the new financial year, but that looks very challenging now. According to consensus estimates, the Sensex companies' EPS for FY13 is Rs 1,215, while that for FY14 stands at Rs 1,390. Edelweiss Securities believes such estimates imply an EPS growth of 17 per cent, which is very optimistic in the current context. BofA-ML believes the downgrade trend will lead to a FY14 Sensex EPS below Rs 1,300 (growth of less than 10 per cent YoY) versus the current bottom expectations of a 17 per cent growth.

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