Winners and losers of Q1:: Business Line,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Even as India Inc. put up a strong show on sales and net profits for the June '11 quarter, margins were squeezed by raw material costs.

As Indian stocks tumble in response to global events, where should investors look for key buying opportunities? If that's your question today, why not first look at the sectors and stocks that are delivering reasonable profit growth, despite the challenges of high input costs and interest rates?

Running the numbers for the latest June quarter results filed by companies throws up three key trends that may help investors size up their investment candidates.

BIG PICTURE

Even as India Inc. put up a strong show on sales for the June '11 quarter compared to a year-ago period, raw material costs cast their shadow on profits, going by the results declared thus far. However, rising interest rates proved a blessing in disguise for companies with large cash coffers, with ‘other income' propping up the profit picture.

Revenues for India Inc. expanded 26 per cent in the June '11 quarter over the year-ago period. The net profit growth for June '11 came in at 14 per cent. For this analysis, we considered the June '11 quarter results declared by 1,637 companies thus far, excluding banks and financial institutions as their cost and margin drivers are quite different.

This is the big picture on results; but here are the interesting trends that drove these numbers.

OTHER INCOME BOOST

Consider the year-on-year growth rates in revenue and net profits for India Inc. for the June '11 and June '10 quarters. Revenue growth for the two periods was relatively the same, at 26 and 25 per cent respectively. Net profit growth, however, stood at 14 per cent in the June '11 quarter — far higher than the 4 per cent growth of the June '10 quarter. This is even as total expenditure expanded by 29 per cent in the June '11 quarter.

This growth can be explained by the 33 per cent rise in ‘other income.' This component includes income a company earns from sources other than its primary operations, which can be from dividend on investments, interest received from banks, scrap sales and so on. Spikes from such sources can be one-time or can fluctuate widely.

A few sectors benefited from this income source to a greater extent over others. Paint companies, for instance, saw collective other income jump 67 per cent in the June '11 quarter. Other sectors that received an ‘other income' boost include hotels, retail and plastics.

For example, paint company Akzo Nobel earned Rs 34 crore in the July '11 quarter in other income against Rs 18 crore in the June '10 quarter. Net sales for the company grew 20 per cent, while net profits recorded a 55 per cent jump. In the retail space, Trent doubled its other income component in the June '11 quarter over the June '10 quarter, helping push net profit growth to 28 per cent. On the other hand, sectors that did well in net profit growth, even without the ‘other income' fillip, included castings and packaging companies.

RAW MATERIAL PRESSURES

Though profits got a helping hand from ‘other income', operating and net profit margins bowed down to input costs. Rising costs of raw material had already begun to make themselves felt in the March '11 quarter. In the June '11 quarter, operating margins slid to 18.8 per cent from the 20.6 per cent in the June '10 quarter. Collective input costs rose 36 per cent. As a proportion of sales, raw material costs accounted for 54 per cent, a sizeable jump from the 50 per cent of sales in the June '10 quarter.

In the textiles sector, input costs as a proportion to sales shot up to 64 per cent from the 59 per cent in the year-ago period on rising prices rising across inputs such as cotton and polyester fibres. Textile biggie Arvind, for example, saw raw material costs expand 60 per cent. Operating margins fell to 13 per cent in the quarter from the 15 per cent in the June '10 quarter.

Similarly, steel companies bore the brunt of iron ore costs and spiralling coking coal prices. SAIL's operating margins declined five percentage points to 20 per cent in the June '11 quarter. As a whole, the steel sector saw input costs eat away 57 per cent of sales in the June '11 quarter against the 50 per cent in the year-ago period.

In the tyres sector, the input cost proportion climbed six percentage points in the June '11 quarter as companies could have procured rubber, its primary raw material, at the peak prices that were hit earlier this year. Other sectors that faced raw material pressures include packaging, paints, chemicals and gems and jewellery.

But even as raw material costs dented the margins of many a sector, a few sectors that did bring about cost controls, either in raw materials or in other cost heads such as staff costs, administration, selling costs and so on, helped ward off steep slides in margins.

The agrochemical sector, for instance, boosted operating margins to 17 per cent from the 16 per cent in the June '10 quarter by controlling raw material costs. The proportion of input costs to revenues declined two percentage points to 62 per cent in the June '11 quarter. Plantation companies, such as McLeod Russell and Tata Coffee, boosted operating margins by controlling staff and power costs. FMCG companies countered a rising input costs component with controls over selling and staff costs to keep operating margins at 16 per cent for the sector as a whole.

INTEREST COSTS YET TO HURT

The other important cost centre for most companies — interest — has not begun to weigh on profits yet. As a proportion to sales, interest costs have remained steady at 1.9 per cent in the June '11 quarter. Net profit margins too fell from 10.2 per cent to 9.2 per cent between the June '10 and '11 quarters, attributable primarily to the dip in overall operating margins.

However, interest costs may pinch in the quarters to come. Rates have been steadily rising and are likely to remain high; liquidity is also tight. With rounds of capital already raised in FY-11, which had in part lowered leverage and eased interest cost burden, further equity raising may be harder to come by in the next couple of quarters.

In this light, a good many sectors have seen sharp dips in their interest cover between the June '10 and '11 quarters, which makes it harder for them to hold on to profitability in a rising interest rate scenario.

For instance, overall interest cover for paper companies dropped to 3.7 times from the 5.9 times in June '10, hit by a combination of flat profits and a rise in interest. Steel companies too suffered a steep decline in cover on lower profitability. Other sectors that could fall prey to interest costs include tyres, cement and cables.

A few sectors managed to reduce the interest burden and inflate cover available, leaving them more able now, than in the previous year, to take higher interest costs into stride. These include sectors such as agrochemicals, whose cover shot up to 8.9 times from the 3.3 times in the June quarter. Companies such as Bayer Corp and United Phosphorous effected sharp cuts in interest outgo.

The hotels sector saw declines in interest costs for most companies with interest as a proportion to sales drop four percentage points in June '11 quarter to 5 per cent. Bigger players in this sector such as EIH and Indian Hotels reduced interest costs by as much as 38 per cent. Other sectors such as pharmaceuticals, retail and shipping have all improved on interest cover.

Ahead of the pack

All said and done, in terms of revenue and net profit growth, a handful sectors did clock in strong performances.

FMCG companies, for instance, bettered growth rates in both sales and net profits in the June '11 quarter, though they did see pressures from rising raw material costs.

Media companies posted an 18 per cent revenue growth and a 40 per cent net profit growth, having managed to control interest costs while receiving a nudge from other income.

Dark horses

Outperforming sectors also included a couple of dark horses. The agrochemical sector is among these.

They paired control over raw material and interest costs with a 14 per cent revenue growth to end with a strong 46 per cent growth in net profits.

United Phosphorous, for example, grew revenues by 30 per cent in the June '11 quarter and cut interest costs by almost 70 per cent, which resulted in net profits growing multi-fold.

Bayer Corp and Rallis India were other companies that notched up good revenue and profit growth.

Another one of the dark horses is the infrastructure and construction sector with bigger companies such as Larsen & Toubro and Sadbhav Engineering as well as a few smaller players such as Tantia Constructions recording better growth rates of sales and net profits in the June '11 quarter over the year-ago period.

A few cement companies, such as Prism Cement and Shree Cement, came in with revenue growth in the June '11 quarter, outpacing the June '10 quarter, with the sector overall managing a 34 per cent growth.

On the net profit front, however, most companies simply arrested the extent of decline in net profits