Input costs to eat into Nifty cos' profits

MUMBAI: Metals producer Sterlite Industries and the nation’s largest carmaker, Maruti Suzuki, will lead a 23% jump in quarterly earnings for Nifty companies, the highest in seven quarters, as the two companies benefited from soaring commodity prices and cheap loan-driven sales.

But profitability of the companies may plunge to the lowest in 16 quarters due to a steep jump in raw material prices.

The ET Intelligence Group’s March quarter forecast covers 36 companies in the S&P CNX Nifty index and excludes banks and oil companies because of their peculiarities.

Export-dependent software producers and drugmakers may bear the brunt of rupee appreciation against the dollar. And the tariff war would hurt telecom companies.

The end of the quarter rally in bonds and a surge in loans could save the day for banks, which were feared to make paper losses in treasuries when government bond yields rose to as high as 8%. Bond prices and yields move in opposite direction.

“Lower base effect and volume uptick are likely to be the key drivers,” Sandeep Gupta of Edelweiss Securities wrote in his forecast report. “Oil marketing companies are likely to register an erratic dip in core profits, primarily due to a lower allocation of subsidies.”

The growth in earnings is partly amplified by a poor show in the same quarter the previous year, when consumption and production fell due to the global credit crisis. The economy and the market have revived since.
Aggregate revenue of the Nifty sample is expected to rise 14% from a year earlier.

Inflation looms over future show

This is above the 17% growth in the December 2009 quarter. Growth in net profit is likely to be stronger at 23% on top of the similar growth rate in the previous quarter.

The earnings growth outlook and cheap money across the globe led to a rally in stocks taking them to a near two-year high. But the optimism may slowly turn, given the rate at which prices are rising, with just a few gainers from it, as most manufacturers are unable to pass on the rise to consumers.

India Inc’s operating profitability may drop due to higher prices of steel, copper and aluminium. Operating margin of the Nifty sample is expected to shrink by 290 basis points to 22.7% from a year earlier, the lowest in 16 quarters. A basis point is 0.01 percentage point.

Prices of most commodities were at their lows a year ago. Aluminium, zinc and copper on the London Metal Exchange had crashed by more than half on a year-on-year basis in the March 2009 quarter. The subsequent quarters witnessed a gradual increase in the prices, helping these commodities regain most of the lost ground by the end of March 2010.

The top performers during the March quarter are likely to be automobiles, metals, cement and capital goods. For a detailed commentary, see the quarterly coverage in this week’s Investor’s Guide.

Cement and capital goods would derive their growth, mainly from buoyant underlying demand from user-industries.
Profits of Grasim and Jaiprakash Associates may be higher due to improved realisations on a cement per tonne basis and higher sales. This is despite a 25% rise in international prices of coal, a major raw material, coupled with higher freight costs due to the recent increase in diesel prices.

Steel companies may witness a moderate growth in absence of steep rise in prices of final products. Aluminium maker Hindalco and Sterlite, which manufactures copper, zinc, and aluminium, would be the major beneficiaries of higher commodity prices.

Explorers Oil & Natural Gas Corp and Cairn may reap profits from the two-thirds jump in crude prices. Reliance Industries, an integrated refining company, would be able to report higher refining margins due to increasing product prices.

An appreciation of over 4% in the rupee against the dollar could dent profitability of Infosys Technologies and Ranbaxy Laboratories.

Reliance Communications and Bharti Airtel are expected to post sluggish numbers for a third straight quarter due to the ongoing tariff war. Idea Cellular, the third-largest listed telco, may be an exception, with a 21% sequential growth in net profit backed by double-digit sales growth.

State-owned Bharat Heavy Electricals, and ABB, the power equipment maker, may report a jump in sales and profits, as their order books swelled and due to lower operating expenses.

The good show by companies in the March quarter may be overshadowed by concerns over the rising inflation, which may lead to higher interest rates, hence lower future growth, and less earnings upgrades.
The Society of Indian Automobile Manufacturers is forecasting sales growth to fall by half this fiscal from 26% last year, as prices and interest costs are rising.

“We do not expect meaningful upgrades over the next quarter,” Citigroup said in a note.