Strong sectoral performance holds up Net profit growth

Last Updated: Thu, Aug 19, 2010 20:50 hrs

Exemplary push by automobiles, casting & forgings, entertainment, fertilisers, mining & metals.

Company results for the June quarter turned out better than expected, with net profit growth of 14.3 per cent, excluding three public sector oil marketing firms. The profit growth rate was 20 per cent excluding the oil and gas sector and around the same after excluding the banking and finance sector from the sample.

Growth drivers for India Inc were automobiles, castings & forgings, entertainment, fertilisers and mining & metals, with more than 100 per cent rise in net profit. Auto ancillaries, paper, plantation, retails, technology hardware and textiles fared better, posting over 50 per cent profit growth. Airways, sugar and telecom sectors reported net losses.

(Y-o-Y in %)

Quarterly growth in net profit

Sep ‘09 Dec ‘09

Mar ‘10

Jun ‘10
Steel -85.71 -27.48 LTP 337.10
Entertainment 11.99


LTP 268.97
Fertilizers -74.81 129.58 118.82 196.12
Automobile 658.35


221.35 193.60
Mining & Mineral  -20.94 -39.60 105.85 137.83
Forgings & Fastners -20.30



Trading -18.33 37.43 123.15 123.66
Textiles LTP LTP LTP 117.87
Gems & Jewellery 22.76 479.21 590.65 78.78
Auto Ancillaries -1.22 278.87 311.99 50.47
Total 28.11 33.88 37.49 -0.81
Total (Ex oil & gas) 1.53 46.04 70.70 20.74

Quarterly growth in net sales

Mining & Mineral -21.49 3.66 27.48 86.70
Automobile 6.99 49.22 63.50 48.43
Auto Ancillaries 12.58 48.81 56.47 36.96
Realty -29.94 30.66 67.64 36.33
Refineries -23.07 17.37 44.56 33.20
Sugar -10.43 18.28 71.11 32.83
Non-Ferrous Metals -9.42 47.21 58.27 29.70
Textiles 17.51 27.22 25.04 26.98
Airways -18.19 -1.27 17.09 26.65
Paints/Varnish 12.19 21.23 29.01 25.39
Total -7.57 13.17 28.07 21.71
Total (Ex oil & gas) -0.55 11.65 22.99 17.97
LTP: Net loss to net profit.  Total Common sample of 2,643 companies

Banks, engineering, gems and jewellery, non-ferrous metals, pharmaceuticals, shipping and trading fared well, posting net profit growth between 20 per cent and 46 per cent. Chemicals, FMCG (fast moving consumer goods), power and steel sectors disappointed. Agro chemicals, cement, construction, consumer durable and telecom sectors reported a decline.

Revenue growth came from Reliance Industries, automobiles, auto ancillaries, airways, consumer durables, entertainment, forgings & castings, mining & metals, nonferrous metals and textiles. Software, pharma, FMCG and paper did moderately well. Steel, telecom, construction, fertilisers, infrastructure and shipping disappointed with insipid revenue growth.

Money spinner
The results analysis shows there has been at least one or more winner in each sector. Reliance Industries and Cairn India fared well in oil and gas, where public sector refineries posted a decline in profit. Tata Motors reported explosive profit, well supported by Ashok Leyland and Bajaj Auto. SpiceJet, with over Rs 700 crore quarterly revenue, earned Rs 55 crore profit, while Kingfisher Airlines went deeply into the red. United Breweries and Empee Distilleries did well, while alcohol and beverages leader United Spirit registered a decline in net profit. TCS, Wipro and HCL Technologies shored up the information technology sector, while Infosys Technologies reported flat profit.

Motherson Sumi, SKF India and Fag Bearings top the auto ancillaries’ earnings chart, and shore up sector profit growth by over 70 per cent. Many public sector banks, led by banking giant State Bank of India, and HDFC Bank and Kotak Mahindra Bank, pulled up banking sector profit growth. BHEL lifted the profit growth for capital goods when ABB, Areva T&D and KEC International recorded a decline in net profit. Ambuja Cement and Kalyanpur Cement were the most profitable cement companies: giant ACC and others reported a decline in net profit.

BGR Energy, Thermax, Atlas and others fared well in engineering and capital goods, when Larsen & Toubro recorded a slowing of earnings. Sun TV Network and UTV Software lifted entertainment segment profit, whereas IBN18 Broadcast, TV18 India and NDTV reported losses. Coromandel International and GSFC showed good profit growth, while GNFC reported a net loss. Godrej Consumer, GlaxoSmithKline CHL and Nestle reported decent growth in profit, while Hindustan Lever, Britannia and Nirma posted a decline in net profit. Almost all castings and forgings makers did well, with Bharat Forge outstanding.

High prices and volumes were positive for metals, while strong car sales drove PAT (profit after tax) growth higher for autos on a year on year (y-o-y) basis. Banks did well on improving net interest margins on the back of credit growth and a decline in cost of deposits, while property developers cashed in on an improving real estate market. Lower cement prices were negative for the sector, while telecom companies continued their slide owing to increasing competition and higher costs. Oil and gas were affected, mainly due to non-payment of subsidies by the government.

Tata Motors, Bajaj Auto and Ashok Leyland led auto sector growth, while Maruti Suzuki and Hero Honda faced a rough ride. Automakers recorded net sales growth of 48.5 per cent, driven by strong economic recovery, availability of credit and new product launches. Growth continues for all segments, with two-wheelers growing by 29 per cent, cars by 28 per cent, commercial vehicles by 56 per cent and utility vehicles 31 per cent.

Operating margins on sale of vehicles improved sharply by 474 basis points (bps) to 13.26 per cent due to Tata Motors’ and Ashok Leyland’s significant improvement in year on year operating margins. Raw material cost inflation came under control on better product mix and modest price rise.

Tata Motors’ first-quarter surprise was led by stronger realisations, reflected in better-than-expected consolidated operating margins of 10.48 per cent from sale of automobiles, compared to minus 2.58 per cent a year earlier. Overall operating margins improved 390 bps, quarter on quarter. Ashok Leyland grew 156 per cent on impressive sales and a low-base effect. For Ashok Leyland, domestic sales grew 187 per cent while exports grew 115 per cent. High sales volume and efforts to contain raw material costs enabled growth of 810 bps in operating profit margin.

Tata Steel’s turnaround at a consolidated level changed the net profit growth rate from negligible to 335 per cent. Tata Steel’s June quarter consolidated profit was Rs 1825.3 crore (net loss of Rs 2,208.7 crore at the same time last year). Operating margins on sale of steel improved to 13.3 per cent from minus 3.5 per cent. At standalone levels, Tata Steel did well, with net profit growth of 100 per cent. Margins from Corus were disappointing, declining 16 per cent sequentially to $79 a tonne.

Steel Authority of India reported a decline in sales and profit. Profitability was affected by different factors, including sharp input cost escalations and lower sales volume. The adverse impact of an increase in prices of inputs such as coal, ferro-alloys and nickel during Q1 amounted to Rs 556 crore (Rs 368 crore due to imported cocking coal alone). Partially neutralised by better product-mix and higher production of special value-added steel items.

Mounting inventories with producers have dashed hopes of an early recovery in steel prices. The price cuts and cost pressure saw margins decline by 76 bps quarter on quarter. However, strong results from Tata Steel improved margins significantly, by 760 bps.

Non-ferrous metals
The sector saw decline in growth rate in sales and profit compared to the previous two quarters due to margin compression. Operating margin of companies declined over 500 bps sequentially and 180 bps y-o-y, due to lower prices and higher costs. Average zinc and lead LME prices were down 11 per cent sequentially at $2,062/tonnne. Average aluminum LME prices are down three per cent sequentially at $2,128/tonnne.

Hindalco saw its y-o-y margins decline — in aluminium by 11 bps at 11.8 per cent and in the copper segment by 255 bps to 3.75 per cent. Sterlite Industries’ margins from copper were up 152 bps to 6.46 per cent, but down 429 bps to 7.46 per cent in aluminium. Hindustan Zinc posted a 29 bps drop in margins from zinc and lead operations at 47.3 per cent.

The pharmaceutical industry reported strong results, as leading drug makers such as Ranbaxy Labs, Sun Pharma, Glenmark Pharma and Torrent Pharma reported over 100 per cent rise in net profit. Dr Reddy’s Laboratories and Aurobindo Pharma disappointed, while Lupin and Cadila Healthcare recorded encouraging net profit growth. Cipla and Glaxo Pharmaceuticals reported a modest growth in net profit.

Ranbaxy beat estimates significantly, led by non-recurring sales of Valtrex and significant other income of Rs 127 crore. India sales, excluding tenders, rose 11 per cent, while Terapia reported growth of 27 per cent. The US base business declined on lack of new product introductions. Ranbaxy has indicated a meeting with US drug regulatory officials over the next three to four months, after which an inspection of its Dewas and Ohm Labs will take place.

Sun Pharmaceuticals beat estimates, mainly due a positive surprise from higher non-recurring US sales. The revenue growth of the base business, however, was restricted to nine per cent. The company’s base business margins continue to recover and increased to 28 per cent, but are well below the historical levels of 33-35 per cent, due to lower sales in the US and higher regulatory compliance-related costs.

Dr Reddy’s performance in the US has been below expectations of the management. Excluding revenues from sales of Sumatriptan, the growth was nine per cent, down 7.5 per cent. Revenues from Russia & other CIS markets rose 36.4 per cent, due to restocking of inventory. The net profit was lower by 14.3 per cent, due to muted base business revenue growth.

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