Q4 likely to be a mixed bag, say experts

Our Bureau Mumbai | Updated on March 16, 2011

Though market experts are in sync with each other over the fact that company profits will decrease in Q4 FY11, they are divided over how much the quantum would be.

A Crisil study across 23 industries has pegged the operating profit margin to be in the range of 22-23 per cent for Q4 FY11, down from 26.1 per cent over the corresponding quarter of last year (Q4 FY10).

“Demand has not slowed down,” said Mr Mansingh Deshmukh, Head-Equities, JHP Securities. “We do not expect a decrease in excess of 2 percentage points over last year's Q4. The quarter is expected to be a mixed bag with some sectors like capital goods seeing a significant decrease and others such as FMCG seeing no impact,” he added.

Margin pressure always succeeds a slowdown in demand, but rice cuts have not yet started, said experts. But the sign of a margin squeeze is already there.

“Rising commodity prices globally and hardening interest rates are an issue, but they will be felt in a more pronounced manner only in the next quarter due to the lag effect,” said Mr Manish Laddha, Head-Research, Ideas 1st Research.

Factors responsible

The Crisil report said rising cost of inputs, stiff competition, currency risk, increase in employee cost due to attrition and wage inflation, were the major contributors to a decrease in pricing power of firms in Q4.

However, there are industries that have been able to pass on the cost increases to their customers. “The steel industry was able to pass on the sudden increase in met coke prices due to Australian floods in a phased manner but is yet to pass it on fully,” said Laddha. On the other hand, cotton yarn manufacturers were able to pass on the sharp increase in raw material cost, thanks to robust demand, said the Crisil report.

Though there is general expectation of a drop in margin, experts view this as a blip and said top line growth would be significant for the last quarter of this fiscal. Crisil top line growth estimates for Q4 FY11 put it in the range of 20-21 per cent, down from 22.4 per cent in the corresponding quarter of last fiscal (Q4FY10).

Published on March 16, 2011

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