Mumbai, July 7: Indian companies may report revenue rose 9-11% in the quarter ended 30 June, more than double the pace it grew in the year earlier, amid the first signs of a turnaround in the automobile and the cement industry.
Revenue grew 4.3% in the quarter ended 30 June 2013 and 8.4% in the three months ended 31 March, with growth largely driven by strong growth in export-oriented companies and select domestic consumption-driven sectors, according to a 3 July report by ratings company Crisil Ltd. Earnings season kicks off with the second-largest software services company Infosys Ltd reporting its June quarter earnings on 11 July.
“While a gradual resumption of stalled projects and improvement in global economic growth bode well for longer-term revenue growth, the increasing probability of a below-normal monsoon enhances downside risks for sectors that generate substantial revenue from the rural areas,” Crisil said, adding that for the fiscal year 2014-15, it expects Indian companies to report 11-12% revenue growth.
The study covered 600 companies, excluding financial services and oil companies, representing 71% of India’s overall market capitalization. S&P BSE 500 Index, which represents 93% of total market capitalization, has risen 38.2% in the June quarter.
“We could see some green shoots towards the start of a turnaround in earnings,” said Nitin Bhasin, head of research at Ambit Capital Pvt. Ltd. “The striking things to watch for are going to be the results of auto and cement companies as they may see a significant improvement in their earnings growth,” Bhasin said, adding that moderation of costs have aided cement companies and auto companies have benefited from improving demand for passenger vehicles.
The benchmark stock market indices have risen the most in nearly five years in anticipation that the government will effect economic changes that will boost economic growth. The BSE’s 30-share Sensex gained 13.5% in the June quarter, the most since the quarter ended September 2009. The surge in stock prices have prompted some analysts to warn about valuation concerns.
The BSE’s 30-share Sensex trades at 16.6 times one-year forward price-to-earnings (PE) ratio, the highest among its Bric (Brazil, Russia, India and China) peers. It is also higher than its five-year historical average of 15.9%. “While the earnings trajectory is improving, and the economy is bottoming out, valuations of certain cyclical stocks are getting stretched, after the huge run up,” said Bhasin. BSE Bankex, BSE Capital Goods Index, BSE Auto Index and BSE Realty Index have risen 19.9%, 34.9% and 14.8%, and 44.9%, respectively in the quarter ended June.
“Valuations are getting a tad bit expensive; earnings are not going to play out in a big way. While we will see some improvement, there is not going to be any major uptick in earnings,” said Ambareesh Baliga a market analyst. “The early signs may be positive but it will take two or three quarters more for the earnings to improve significantly.”
Margins, meantime, are expected to stay broadly stable or increase slightly, according to experts. “Given current low capacity utilization and margins near lows versus history, a forecast for a mild improvement in margins remains realistic, with potential upside in case of a stronger recovery,” HDFC Securities Ltd’s retail research unit said in its July strategy report. Crisil expects Ebitda (earnings before interest, tax, depreciation and amortization) margins to remain stable around 17% in June quarter, with some sectors outperforming.
According to Prasad Koparkar, senior director of Crisil Research, the IT services sector will see 125-150 basis points (bps) year-on-year improvement in Ebitda margin, and FMCG (fast-moving consumer goods) could see gains of 75-100 basis points. Telecom sector margin could widen 80-100 basis points because of a decline in marketing costs and an improvement in subscriber acquisition, he said. On a sector specific basis, for IT companies, the April-June quarter is a seasonally strong quarter.
“We expect Q1FY15 to set the tone for a better FY15 compared to FY14, riding on a seasonally strong quarter and improved prospects from US even as Europe remains the growth driver,” Edelweiss Securities Ltd’s analysts Sandip Agarwal and Omkar Hadkar said in a note on 2 July.
Edelweiss has estimated a 1.4-5.5% sequential revenue growth for the top-4 IT players —Tata Consultancy Services Ltd (TCS), Infosys Ltd, Wipro Ltd and HCL Technologies Ltd (HCL). Growth momentum is likely to sustain for pharmaceutical companies. “Continued traction in low-competition US launches and a domestic market rebound would likely shore up Q1 earnings of our pharma universe,” Religare Capital Markets Ltd said in a 2 July note, adding that it expects a year-on-year net profit and sales growth of 21% and 23%, respectively.
The positive surprise this quarter could come from auto companies, which have seen a pick up in volume growth due to the impact of excise duty cuts announced in the interim budget in February. Kotak Securities Ltd expects a strong quarter for auto companies with companies likely to post revenue growth of 24% and net profit to surge 53% from a year earlier. Consumer products, however, are likely to turn in a bleak report card.
“We expect the broad (weak) trends seen in the past few quarters to sustain for the Indian FMCG sector. Green shoots are unlikely to show up,” Kotak analysts Rohit Chordia and Anand Shah said in a 4 July note, adding that management commentaries in the recent past are already suggesting a weak first half of fiscal 2015. “We find the sector expensive and would tread selectively,” they said, even though the BSE FMCG Index was the only sectoral index to post a decline in the last quarter. It has shed 4.2% in the June quarter. For banks, asset quality may continue to haunt lenders for a while, said analysts.
“Deteriorating asset quality with a rise in delinquency and increasing provisioning charges had been the key highlight of previous couple of years. Going forward, we believe the improvement in economic cycle would have its lag effect in channelizing towards healthy asset quality ratios,” Jignesh Shial, an analyst with IDBI Capital Market, said in a note on 4 July. “Thus, weak asset quality trend may stay for couple of quarters. However, we expect fresh slippage ratio to ease gradually,” Shial added.