Nifty50 companies lose steam, to grow at a slower rate

MUMBAI: Growth is likely to moderate for the Nifty50 companies in the September 2014 quarter compared with that in the previous quarter, according to the latest quarterly estimates by the ET Intelligence Group.

At the aggregate level, the 50 large and most frequently traded companies in India Inc will report 7.9% year-on-year increase in net sales and 11.4% rise in net profit for the September quarter. This compares with 16.3% growth in sales and 18.6% jump in net profit of the sample for the June 2014 quarter.

The rate of sales growth is also expected to slip to single digit after four quarters of year-on-year double-digit growth since a majority of the companies in core sectors such as banking, capital goods, construction, infrastructure, and power are taking more time than expected to show demand improvement.With core sector demand still lagging, the baton of growth will once again be passed on to a handful of sectors such as fast moving consumer goods (FMCG), information technology (IT) and pharmaceuticals. "It will be a mixed bag with sector-specific trends. Sectors such as IT, pharma and consumers will continue to do well while capital goods, PSU banks and power may disappoint," said Sonam Udasi, head of research, Tata Asset Management. Select companies in FMCG, IT and pharma sectors have been leading from the front over the past few quarters. Their share in sales and net profit of the sample was at a 9-quarter high during the June quarter. The situation is expected to continue in the September quarter as well.

The three sectors will contribute 13% to the total revenue of the sample and 26% to the net profit. During the corresponding quarter two years ago, their share in revenue was 11%, and in profit, 19%. Some industry trackers believe that the year-on-year appreciation of the rupee against major currencies may have some impact on the overall growth.

"Over the past year, the rupee has appreciated from 68 to 62 against the dollar. This is negative for revenue growth and operating profitability," said Dhananjay Sinha, research head and strategist, Emkay Global Financial Services. Sinha, however, feels that the impact of astronger rupee will be mitigated to some extent by better export volumes and improved operating efficiency.

The sample’s operating margin is likely to stay at the previous quarter’s level of 19.6%, helped by softening commodity prices and improved cost management. Operating margin has improved gradually from the ows of around 17% nine quarters ago.

While exports and consumer-centric sectors are holding on to the momentum, the core sector is taking time to recover. "We are not yet witnessing a clear signal of improvement in the investment cycle. It is taking more time than expected for a turnaround," said VK Vijayakumar, investment strategist, Geojit BNP Paribas.At the sector level, apart from FMCG, IT and pharma, automobiles and auto ancillary sectors are likely to report robust numbers for the September quarter.

"Auto and ancillaries will outperform due to better volume growth. Operating leverage and falling commodity prices will help in the expansion of operating profitability," said Udasi of Tata Asset Management. In the case of banking, public sector banks are likely to show higher non-performing assets. In addition, the credit growth has been lower as banks are exercising more caution while issuing loans.

Cement companies are expected to start showing signs of revival as volumes pick up. In the case of capital goods, barring Larsen & Tubro, companies will continue to struggle with subdued demand.

"A near 40% exposure to overseas markets will help L&T report good numbers," said Vijayakumar of Geojit BNP Paribas. While companies have started taking initiatives to reduce borrowings, it may be a while before the efforts help in cutting borrowing costs.

"Companies have been focusing on cutting debt. We may see a gradual reduction in overall debt levels from the third quarter. But borrowing levels of capital goods and infrastructure companies will take a few more quarters, depending on the cash flows from capitalintensive projects," said Udasi.