Slow operating profits of companies have kept earnings under check

Manish Jain, a fund manager at Ambit Asset, said, “So far, the results season appears to be quite a mixed bag, with 40% companies announcing results in the fiscal third quarter with an upgrade/downgrade ratio of 1:2.” Management Jain said that while large companies have posted earnings growth, volume growth has come down due to margin expansion.

The price hikes companies took to offset inflation eroded some of the profit despite weak volume growth in revenue growth. As per the data of 399 companies (excluding banks and financial companies) analyzed by PeppermintNet sales in the December quarter rose 15.9% from a year ago, the slowest rate in eight quarters.

In addition, companies continued to feel the impact of higher input costs, although the intensity of cost pressures decreased.

Profit before interest, tax and depreciation (PBIDT) increased by 1.5%. Raw material costs rose 14.5% from a year ago during the December quarter, slowing from a 40% rise in the previous three months.

In addition, higher interest costs dragged down earnings, with net profit declining 3.8% from a year earlier but rising 11% from the prior September quarter.

The BFSI (Banking, Financial Services and Insurance) sector continued its stupendous performance.

An analysis of data from 495 companies, including banks and financial companies, shows that net revenue grew by 15.9%, PBIDT by 14.5% and net profit by 9.7%.

Analysts said medium and small-sized companies posted a strong growth driven by increased market share.

Amnish Agarwal, head of research, Prabhudas Lilladher Pvt Ltd, said softening raw material costs supported earnings of only a few companies and the overall performance was mixed. Limited

The December quarter was also better than expected for IT services companies. Analysts were expecting a cut in revenue estimates for the current quarter due to slowdown in western markets. Experts say caution is still in place, but tier-1 IT services companies have fared better in terms of revenue performance.

VK Vijayakumar, chief investment strategist at Geojit Financial Services, said the banking and IT sectors have performed well.

Vijayakumar said HDFC Bank, ICICI, Kotak and Axis posted excellent numbers and IT services also did well despite concerns over the US slowdown.

Infosys excelled. Vijayakumar said the performance of IT services and financials is extremely important as these two segments contribute around 52% to India Inc’s profits.

Another segment that stood out was the automobile sector, with unexpectedly good earnings from Tata Motors, Bajaj Auto and Maruti Suzuki India. However, the manufacturing segment is still showing pressure from rising interest cost, experts said.

“Margins are under pressure from rising interest costs, even as segments such as FMCG (fast-moving consumer goods) have benefited from lower input prices. However, demand remains a concern for the FMCG segment”, said Vijayakumar.

Among blue chips, Asian Paints and Pidilite disappointed, he said.

A traditionally strong third quarter is crucial for companies dependent on discretionary consumption.

“As expected, we saw strong demand from discretionary consumption companies during the quarter,” Jain said.

However, rural demand remains weak, and growth is being led by the premium segment, cautioned Jain.

Another encouraging sign is that gross margins have started improving sequentially on stabilization of raw material prices, and the outlook remains optimistic, Jain said. Overall, he said, quality orientation and growth focus should return to the market.

As optimism prevails, however, the performance in the ongoing quarter may not be able to contribute much to the market’s gains. Aggarwal said results will play a limited role and big events like budget will drive the market.

Experts say that in this challenging environment it is better to stick to the safety of large caps. Agarwal said that if there is some change in the tax on capital gains, then there may be more pressure on midcaps and smallcaps.