Early birds herald result season with good tidings

A strong set of numbers from technology firms, together with sterling performances from heavyweights Reliance Industries and ITC, have given India Inc a flying start this earnings season. Both Infosys and Tata Consultancy Services set the markets on fire before the slow movers — the two-wheeler players — tempered the sentiment. Hero MotoCorp was a huge disappointment with the company reporting a 20% year-on-year drop in net profit as it sold more of less profitable models while Bajaj Auto’s bottom line rose just 3% y-o-y as margins contracted.

That apart, the trends have been encouraging. Almost all private sector banks to have announced results have done exceeding well in what is seen to be a highly competitive environment. HDFC Bank reported its customary 30% y-o-y rise in profits, its asset quality as impeccable as ever, while Axis Bank did well to post a 22% y-o-y increase in the bottom line.

For a sample of 77 companies (excluding banks and financials), skewed heavily in favour of software giants, revenues grew nearly 19%, y-o-y, comparable with the previous three quarters. With companies keeping costs in check, operating profit margins expanded nearly 200 basis points, a sharp improvement over the previous three quarters when they had contracted by anywhere between 150 and 400 basis points. Consequently, operating profits saw a big jump of 38% y-o-y, driving up the bottom line for the sample by an impressive 51% y-o-y. That compares with a 17% increase in the three months to September and a drop in the two quarters before that.

RIL’s presence in the sample does tend to distort the picture — it posted a 24% y-o-y rise in net profit to R5,502 crore on the back of strong refining margins and a rebound in margins for the petrochemicals business. ITC’s profits rose 21% with tobacco revenues robust and non-tobacco FMCG revenues up 30% y-o-y.

However, it’s early days yet and industry continues to tread cautiously. Bajaj Auto MD Rajiv Bajaj, for example, believes the road ahead could be bumpy for a bit. Operating margins in manufacturing continue to be under pressure. At Exide, for instance, they crashed 170 basis point y-o-y while Hero Moto’s gross margins were dented by 104 basis points and at Hindustan Zinc they fell 190 basis points. The software set remains optimistic; TCS MD & CEO N Chandrasekaran says the environment remains good and deal flow strong.

Nevertheless, what’s remarkable about the quality of the bottom line this time around is that there’s virtually no contribution from other income. Other income was higher by just 6% y-o-y whereas it rose more than 35% y-o-y in each of the three preceding quarters. Surprisingly, tax outflows are up just 10% y-o-y against the 13% y-o-y increase in the September quarter.