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Sunday, July 25, 2010

250 Manufacturing Cos Post 22% Net Rise Against 50% In Past 3 Qtrs

Input costs chip away at profit margins

 EARNINGS growth for manufacturing sector remains robust due to higher demand, even as spiralling input costs ate into margins for the quarter-ended June, with net profit rise skidding to the slowest pace in the past four quarters, an ETstudy shows.
    The 250 manufacturing companies that have declared quarterly results have collectively posted a net profit growth of 22%, led by capital goods maker Bhel, two-wheeler firm Bajaj Auto, Sesa Goa, Coromandel International, TVS Motor, Whirlpool, Vardhman Textile, Escorts, Thermax and UB. The same set of companies had reported an aggregate 50%-plus growth in earnings for the past three quarters, compared to the corresponding period the previous year.
    What's keeping the good times alive is high demand. Although at 23%, sales growth for the past quarter was a tad lower than for the three months ended March 2010, it propped up earnings for the early clump of manufacturing companies.

    But analysts are already seeing moderation in industrial expansion, which could impact future sales growth and, in turn, decelerate earnings growth. The index of industrial production, a barometer of manufacturing activity in the country, grew 11.5% for May over the same month last year, much below expectation of around 16%.
    "While the numbers are lower-thanexpected, we see no need for undue concern, as data trends both at the macro
and sectoral fronts are healthy," said a Citigroup report dated July 12. "We were expecting the numbers to moderate from June, due to a fading base effect, but May data indicates that the moderation has already begun. This is reflected across segments, though it is more prominent in capital and consumer goods," said Rohini Malkani and Anushka Shah, co-authors of the report. Raw material prices jump 29%
POOR performance of the country's largest carmaker Maruti Suzuki, besides cement major ACC and Kesoram Industries, pulled down aggregate profit growth for the manufacturers. While Maruti Suzuki reported 20% drop in profit due to higher royalty payments, forex fluctuations and hardening commodity costs, ACC's earnings were hit by lower realisations, higher fuel and power costs and freight charges.
    Overall, the firms in the study saw a 29% jump in raw material expenses during the quarter over the year-ago period, similar to the previous quarter that ended March 2010 and relatively faster than the sales growth. This means companies were unable to pass on the entire rise in input costs to the consumers.
    Although increase in interest costs has not started biting yet, it has inched up and is now bordering the double-digit mark, after two consecutive quarters of slow growth. It could well start eating into margins in the coming quarters, if the central bank raises rates at its monetary policy review on Tuesday.
    Meanwhile, nearly a third of companies that constitute Nifty, the benchmark 50-stock index, which have declared results have thrown a negative picture, with earnings growth slowing to just 11%, the slowest pace in at least six quarters. This was largely due to lower standalone earnings of Infosys, Wipro and Idea Cellular as also ACC and Maruti Suzuki over the quarter ended June '09. Analysts are expecting earnings growth of around 20% for the Nifty companies.
    "If the aggregate earnings growth is less than consensus figures, it would be disappointing for the markets, though we need to watch out for numbers from metal companies," said Tarun Sisodia, head of research at Anand Rathi Financial Services. "Numbers from Tata Motors and Tata Steel would be the key," he said.
    Both the firms had reported consolidated net loss in the June quarter last year due to bottomline pressure from their global businesses: Jaguar Land Rover and Corus, respectively. Analysts expect both the overseas companies to improve their performance that could impact overall earnings of the Nifty pack.
    vivek.sinha@timesgroup.com 

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