India Inc may see fall in June quarter profits

For the quarter ended June 2010, corporate profits may slow down relative to the March quarter but will expand at a healthy rate over last year.

That is the forecast made by leading Indian brokerages for the results for the quarter ending June 30, 2010.

Given that much of the rise in stock prices and PE multiples over the past year have been driven by hopes of the strong rebound in 2010-11, the June quarter numbers, which flag off the fiscal year, will be eagerly watched by investors.

Leading brokerages predict that the net sales of Sensex companies may have grown by any where between 26.1 per cent and 32.6 per cent in the just concluded quarter.

Net profit estimates for this period show a fairly wide divergence. Motilal Oswal Securities and Kotak Securities, for instance, peg the profit growth at 19.3 per cent and 24.1 per cent respectively in their Results Preview for the quarter. However, Angel Broking pegs the same growth at less than 1 per cent. The above sales growth numbers are supported by strong volume growth in sectors such as automobiles, real estate and textiles and higher prices in the case of metals.

The strong trends in macro numbers such as the IIP and production in six core infrastructure sectors also seem to justify these assumptions. With raw material prices already showing signs of edging up from the previous quarter, most estimates however factor in some compression in operating profit margins of companies.

Net profit growth for the quarter is being aided mainly by higher realisations for some commodities, lower interest costs and improving operating leverage.

Brokerages, however, predict a fair divergence between sectors within the index basket.

Metals (driven by higher year on year realisations), pharmaceuticals, automobiles (sales volumes), textiles and retail are expected to be the big outperformers this quarter, boosting the Sensex profit growth.

Cement (falling prices due to higher supply), telecom (falling tariffs due to competition) and oil and gas are expected to post profit declines over last year.

Even though the recent events in Europe have weakened commodity prices and cast some doubts on the global outlook, most brokerages seem to be steadfast in predicting a strong earnings rebound in 2010-11.

“For FY-2011E, we expect Sensex EPS of Rs 1,052, up 17.4 per cent mainly on account of robust earnings in the metals pack, which is expected to post a 154 per cent growth,” says Angel Broking in its Earnings Preview note.

Using football parlance to pep up its earnings preview note, Motilal Oswal Securities says: “Earnings remains a star striker for Team India. It should remain in steady form in 1Q-FY-11, with Sensex PAT growing 19 per cent. Second half of 2010 for Indian equities depends on the interplay of 11 different drivers. Monsoons and global markets remain the near term triggers for market direction.”

The brokerage estimates that “domestic themes” would contribute to a sustained earnings boost for India Inc in 2011-12 helping earnings grow at 25 per cent annually over two years.

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