India: Strong growth offsets higher wage, input costs

Strong revenue growth allowed Indian companies to see through shooting input prices and higher wage bill, besides rise in borrowing costs, to grow their net profit for the third quarter ended December’ 10, despite seeing margins shrink to the lowest level in eight quarters.

The early set of 75 companies to declare results for the last quarter have together grown net profit by 13% over the year ago period, better than the year-on-year growth in the previous two quarters, according to an ETIG study.

Although rising cost of doing business ate into both operating and net profit margins, that declined to the lowest level since the quarter ended March’ 09, a 28% rise in revenue over same period last year helped companies earn more profit.

But sequential earnings growth has slowed down reflecting more pressure on margins last quarter.

Anand Rathi Securities head of research Tarun Sisodia said the benefit of low base effect in the previous year (2009-10 ), which had been boosting year-on-year financial performance of companies, will be absent from hereon.

Corporate India will now witness real growth that may be lower than the growth propped up partly due to statistical reasons in the previous quarters, but earnings growth estimate remains at a reasonable level for the stock market to carry a positive outlook in the short term, Sisodia said.

Some of the top companies to have declared results have thrown up mixed performance.

So the country’s largest steel maker SAIL Ltd , saw its net profit drop by a third, due to higher price of coal that is required to run its steel plants. Engineering and construction firm L&T beat analysts’ earnings estimates supported by 40% jump in revenues .

 IT bellwether Infosys, however, disappointed with earnings that lagged street expectations.

The handful of banks and financial firms, including HDFC and Axis Bank that have declared results, have generated high profit growth over the year ago period beating analysts expectations.

This may support overall earnings growth of India Inc even as manufacturing sector is facing a severe margin squeeze.

Manufacturing firms that comprised a third of the overall sample in the ETIG study , saw aggregate net profit shrink 5% due to 61% increase in raw material cost over the quarter ended December’ 09.

But demand was strong with 27% rise in revenues in the third quarter. A better picture of corporate performance will emerge in the next two weeks as other large firms declare results.

Strong revenue growth of companies outside the services sector comes despite poor signals from the index of industrial production.