India Inc's profits trip on rising costs

With higher interest rates, inflation and firm commodity prices putting brakes on growth, the net profit of sensex companies grew by a measly 2.9% year-on-year (y-o-y) in the January-March quarter to about Rs 38,600 crore.

Incidentally, net profits grew by a healthy 23% on an average during the first nine months of FY11. Despite the slowdown in the last quarter of the fiscal, India Inc is estimated to have grown its profits by about 21% in the last fiscal.

"Cost escalation and rate hikes affected the bottomline of companies. Cost pressures would continue for another two quarters," said Kishor P Ostwal, MD, CNI Research, an equities research provider. However, the markets have already factored in the decline in earnings, he said.

"The slowdown (in growth) is now reflected in earnings," said Ajay Parmar, head, institutional research, Emkay Global Financial Services. EBITDA margins declined for most of the sectors in January-March. Earnings before interest tax depreciation and amortisation (EBITDA) for sensex firms grew only by about 11% to around Rs 77,000 crore during the quarter, the lowest rise barring the crisis period, data compiled by domestic brokerage firm Motilal Oswal Securities showed.

Earnings growth revived only in FY11 after a "growth holiday" between FY08 and FY10. "The disappointing feature of earnings was the underperformance of several heavyweights across sectors," an analyst at Motilal Oswal said. Private sector finance companies, pharma and FMCG were the only sectors that reported strong earnings. "The macro-economic backdrop remains challenging," observers said. The earnings per share (EPS) growth of sensex companies, which remained flat between FY08 and FY10, was downgraded 4% to Rs 1,203 for FY12 by Motilal Oswal. It grew 21.4% to Rs. 1,013 in FY11.

While market observers estimated a 22% growth in earnings for FY12, they brought it down to 18% following a spate of rate hikes by RBI to tame inflation. "Earnings could fall by 5-7%," Emkay`s Parmar said. Though some expect earnings growth to slip to below 15%, a normal monsoon could ease inflationary pressures and push it to around 18%, observers said.

Public sector banks and telecoms saw the sharpest fall in profit margins. While EBITDA margins declined 2.4% y-o-y to 22% during the January-March quarter for sensex companies, profit margins fell 2.6% to 11%. Though net sales grew 22.4% y-o-y, it was below estimates.

The 30 companies that comprise sensex saw a greater decline in EBITDA and net profit on a quarter-on-quarter basis. EBITDA grew a mere 0.9% q-o-q while net profits declined 4%.

The performance in the last quarter of FY11 is in sharp contrast to the same period the previous year. India Inc ended FY10 with a bang, recording the highest-ever earnings growth in more than three years for the January-March quarter.