India Inc has had a good run thus far this earnings season. For the second quarter ended September 30, top companies have reported a sharp revival in sales and a good growth in operating profits.

Sales have expanded 18.8 per cent year-on-year for the 900 companies that have so far declared numbers. This is a marked improvement over the 4.3 per cent growth reported in the quarter ended June 2013. Operating profits also rose a healthy 12 per cent against 6 per cent in the June quarter. Net profits, however, declined a marginal 0.4 per cent as interest costs and forex losses weighed on earnings. A sector-wise performance analysis shows that export-oriented companies, which gained from a weakening rupee, made a big contribution to the numbers. Import-reliant sectors and those from the core sectors such as cement remained under pressure.

IT, pharma gain

The rupee, in fact, played a major role in how companies fared both on the sales and profit fronts. The impressive sales growth was driven mainly by companies from the software and pharma sectors where a depreciating rupee and an improving demand environment in the US saw sales pick up sharply. Revenues of software companies (all the large ones have already announced their results) grew 28 per cent over last year, accelerating from a 15 per cent increase in the June quarter. September is a seasonally strong quarter for software exporters, but this time around, a revival in IT spends in the US and Europe helped both large and mid-size players. Pharma companies with an export focus gained from good demand in the US generics market. Their sales growth for the quarter was 12.7 per cent, double the number in the preceding quarter. The auto sector, too, reported improved sales growth, helped mainly by numbers from Maruti Suzuki and Bajaj Auto. Both pharma and auto sectors also showed an improvement in profit margins, with the stronger dollar lifting realisations.

A correction in raw material costs, from the cooling off of the global commodity cycle, gave profits a boost in quite a few sectors. The auto and auto-ancillary sector, for instance, saw a fall of 3-5 percentage points in raw material costs as a percentage of sales. FMCG companies reported a healthy sales growth, driven by better rural demand. They also managed a fairly sharp recovery in profitability on lower raw material costs.

The Laggards

While a depreciating rupee aided sales and profits for select sectors, it aggravated problems for others. Companies with sizeable imported inputs faced increased pressure on costs. Cement companies were a good instance of this with an aggregate decline of 37 per cent in the leading companies’ operating profits for the September quarter. Sectors with no export linkages, such as capital goods, also continued to perform badly as the domestic economy struggled. Sales for companies in these sectors declined by 3 per cent in the September quarter compared to a year ago.

Overall, operating profit margins for the 900 companies remained flat on a sequential basis and were 100 basis points lower than last year’s levels. Rising debt and interest rates continued to weigh on the earnings of companies that had large debt on their books. The interest cost as a percentage of sales for the 900 companies was 3 per cent this quarter, up from 2.3 per cent in the same period last year. As a result, net profits stayed flat year-on-year.

> radhika.merwin@thehindu.co.in

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