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Mon, Apr 04, 2011 | Updated 09.34AM IST

4 Apr, 2011, 03.25AM IST,ET Bureau

Nifty 50 companies poised for double-

digit growth in March quarter
MUMBAI | NEW DELHI: Aggregate revenue and net prof IT of Nifty 50 companies are
expected to grow in double digits for the sixth consecutive quarter, according to ET
Intelligence Group's earnings forecast. Auto-makers Bajaj Auto and Tata Motors ,
tobacco major ITC, electrical equipment firm Siemens , IT exporter TCS, and lender
HDFC Bank will drive India Inc's growth machine in the quarter to March 2011.

A sample of Nifty companies shows that revenue is expected to grow by 21.2% during
the March quarter from the year ago period. Operating profit and net profit are likely to
improve by 19.6% and 14.4% respectively.

Though the double-digit sample growth is impressive, what could stoke concern is the
expected slower growth in profits relative to topline growth reflecting a squeeze on
profitability.

The sample profitability, measured in terms of operating margins, is expected to decline

marginally since companies would spend a higher share of their revenues to make up for
costs of raw materials and wages.

Prices of most agro and industrial commodities have firmed up from their year-ago
levels, inflating India Inc's operating costs.

For the March quarter, operating margin of the sample is likely to drop sequentially by
over 50 basis points (bps) to 23.2% and by 30 bps compared with the year-ago levels.
Though the fall is smaller, it may widen in the coming quarters given the unabated
increase in input costs unless companies are able to grow their sales volumes faster.
Prices of base metals including aluminium, copper, zinc, and lead have escalated by 22-
44% in the last 12 months. Prices of agricultural inputs such as wheat, rice, pulses, and
gram have also inched up by 8-10% in the last six months.

Most of the bigger companies have been able to mitigate the impact of the soaring costs
by either passing them onto consumers or by increasing volume sales.

But they may find it difficult to cope with a further rise in prices. Some economists feel
that pricing pressure will continue in the near term."The combination of emerging
demand pressures, higher oil, and structurally high food prices would likely result in an
upward bias to our FY12 inflation estimate of 7.0-7.5%," Citigroup Global Markets said
in a recent report.
You are required to analyse this new item with reference to Corporate Finance
Concepts and submit a hand written / online assignment latest by April 9, 2011.

While companies will have to cope up with the rising proportion of operating costs, the
expected increase in non-operating costs including interest and depreciation could put
more pressure on net profitability. Interest costs are expected to shoot up given rising
interest rates on loans. RBI has increased indicative rates in the economy by 150 basis
points in the last 12 months and analysts expect a rise of another 75 bps by March 2012.

Moreover, commencement of new production capacities would jack up the proportion of

depreciation in net sales at least in the initial stage until the expanded production
translates into greater sales volumes.
Top players in the IT and banking sector are expected to report another quarter of brisk
growth. In the IT sector, TCS, Infosys and HCL Technologies are likely to record a 8-
10% growth in business volumes. A marginal weakness in the rupee against the major
currencies should also benefit overall profitability of these players.

Banks including Axis Bank and HDFC Bank will continue to post a robust growth in
toplines and profits boosted by a sustained credit offtake. An expected recovery in
corporate India's capex cycle during FY 12 could keep the tempo strong for banks as long
as they maintain a healthy ratio between credits and deposits.

Cement companies are likely to report another sluggish quarter due to higher raw
material costs despite higher dispatches. Telecom players, on the other hand, are expected
to show a recovery in their performance given a stable trend in tariffs and sustained
subscriber additions during the March quarter.

Metal companies are expected to benefit due to higher prices of steel, aluminium, and
copper. Integrated steel players such as Tata Steel and Jindal Steel and Power are likely
to outperform the pack given higher steel prices. A jump in aluminium prices will benefit
Hindalco and Sterlite