Monday, August 2, 2010

India Inc sees more misses than hits in Q1

If Hero Honda shocked the Street with a 300 basis points Y-o-Y drop in margins for the three months to June 2010, Hindustan Unilever's bottom line actually fell while GSK Pharma could manage only a single-digit top line growth. Even a smart 40% increase in Mahindra and Mahindra's bottom line was driven partly by lower other expenses, lower taxes and higher other income. The biggest disappointment came from engineering major Larsen and Toubro, which reported an anaemic 6.4% growth in its top line but managed to a 15% increase in net profit due to to better operating margins. Mercifully, Reliance Industries (RELIANCE.NS : 1013.5 +3.85) delivered a set of numbers that was more or less in line with estimates, with net profit at Rs 4,850 crore. However, not too many analysts are inclined to upgrade the stock just yet.
All in all, India Inc's results for the June 2010 have seen more misses than hits. As Citigroup observes, it's both the top line and operating margins that are hurting profits although margins appear to be more vulnerable right now.
Citigroup believes although easing commodity prices could moderate margin pressures going ahead, it would potentially undermine overall earnings growth, given that a fairly high share of earnings growth was driven by metals.
For a sample of 795 companies (excluding banks, financials and oil companies) net profits are up just 12% year-on-year, compared with an increase of 50% in the March 2010 quarter. That is despite the fact that revenues have been fairly robust, rising 26%. However, a sharp increase in prices of raw materials has resulted in a fall in the operating profit margins of 440 basis points, leaving operating profits flat.
Interestingly, as HSBC Global Research points out, the results season in the US and Europe is, yet again, coming in ahead of market expectations at top line as well as bottom line, with guidance also surprising to the upside. In India though, the latest IIP number for May 2010, came in at just 11%, much below the number for April, while the core sector index grew at just 3.6% in June, the lowest growth in the last ten months.
It's not that demand is missing. Asian Paints domestic sales, for instance, were up a better-than-expected 28%, though some of it was the result of dealers stocking up ahead of an anticipated price increases. Owing to its brand equity, the company managed to take price increase but despite such a strong top line growth, standalone gross profit margins actually fell 210 basis points. Clearly, not everyone has pricing power -- Hero Honda's profits slipped marginally to Rs 492 crore, shocking the Street, even as the two-wheeler maker struggled to combat higher prices of inputs such as aluminium and steel.
Tata Global Beverages missed standalone earnings estimates by about 20% - thanks to higher costs. Its operating margins came off by a steep 400 basis points to 11.6%. And the competitive intensity in the FMCG space is evident from the fact that HUL's volumes rose just 11% on a low base.Its operating margins fell 180 basis points dute to higher advertising spends.
Tata Communications profits came in way below estimates as voice revenues in the domestic market dropped sequentially, resulting in a sequential fall in the top line both at the standalone and consolidated levels. Among those that have beaten expectations are Titan Industries (TITAN.NS : 2824.45 +18.65) with a 33% increase in jewellery volumes that drove a 42% increase in its top line and a 77 % increase in its bottom line.
Posted by:  S Rahul
Source Credits: Biz.Yahoo


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