Net sales of Sensex stocks up 32%; PAT up 25%: CNBC TV-18 research

Mumbai: 28 Sensex stocks, which have announced their Q1FY07 earnings so far, have reported a 25 per cent growth in profit after tax and equally impressive 32 per cent growth in net sales compared to the same period a year ago. Operating margins and profit margins have, however, taken a small dip on account of rising interest and input costs.

Interestingly, the Sensex stocks have given such 25 per cent earnings on a compounded basis for the last three years and this year too (FY07) it will maintain a 25 per cent growth in earnings, if not more, reckon market experts.

While total expenditure jumped a decent 33.56 per cent, raw material consumed too jumped by 38.24 per cent clearly reflecting the impact of rise in metals and crude oil prices. Gujarat Ambuja suffered a whopping 1,347 per cent increase in raw materials followed by Hindalco (201.68 per cent) and Dr Reddy's (130.35 per cent).

However, auto companies like Maruti and Tata Motors seems to have bucked the trend with a 63 per cent and 40 per cent increase in net profit despite an 11.2 per cent and 46 per cent jump in their respective raw material consumption.

BSE Sensex consists of a bouquet of 30 blue chip stocks representing diverse sector of the Indian economy ranging from oil and gas, auto, capital goods, power, FMCG, software, financial services, pharmaceuticals and metals. India, Asia's fourth biggest economy has reported a nifty 8 per cent plus growth in the last three years taking the market benchmark to dizzying heights. The Sensex had closed at 12612.38 points on May 10 after hitting an all-time high of 12624.37.

"We could soon see these levels by the end of this financial year," feels Deven Choksey of K R Choksey. For that to happen the Sensex should first cross the 11400 levels by the end of second financial quarter, he adds.

Ambareesh Baliga of Karvy Stock Broking also hopes that the earnings growth of 25 per cent shown by the Sensex companies should sustain for the rest of the year. "End of this financial year, we should hopefully cross the previous highs recorded by the Sensex. We are looking at a figure closer to 13000," said a confident Baliga on telephone.

What's heartening is that despite cost pressures on account of spiraling crude prices, hike in domestic interest rates and increasing raw material prices for the manufacturing sector as metal commodities like steel and aluminium touched their historic highs, India Inc has managed to post an impressive 25 per cent growth in profits.

"What's more there is a possibility of a cooling off in prices of commodities like oil and metals some time later this fiscal," says Sumeet Rohra, who thinks that even if the index stocks report a modest 15 per cent earnings growth their valuations would still look inexpensive.

To put the entire Sensex story in core numbers, 16 of these companies have reported an increase in net sales of more than 32 per cent, which is the average for Q1FY07. This list includes:

Banking and software companies seem to be clear winners as increase in interest rates coupled with a strong credit growth and a depreciating rupee helped the cause of these companies in posting above-average sales numbers.

In terms of profit after tax 17 companies' earnings have surpassed the Sensex average of 25 per cent. Cement majors ACC (PAT up by 184.74 per cent on a YoY basis), Gujarat Ambuja (109.33 per cent) and pharma company Dr Reddy's (108.10 per cent) led the PAT list as higher cement offtake on the back of successive price hikes for the first two and strong core performance by the latter made them the top three centurions for this quarter.

But for SBI both the aggregate net sales and PAT increase would have been a tad higher. SBI reported a net loss of 34.69 per cent for Q1FY07 and a drop in net sales of 3.6 per cent. India's leading PSU bank had reported a net profit of 1222.83 crore for the quarter ending June 2006 that included a one-time income of Rs712 crore due to a tax refund. Adjusting for the same, SBI's net profit for Q1FY07 would turn out to be more 19 per cent, says Rohra.

Factors like this apart from the usual suspects like increasing input costs have led to operating and profit margins record a fall of 130 and 86 basis points respectively.

According to Choksey the possible causes of drop in margins are, "There are many factors that might have led to a fall in aggregate margins of the Sensex companies. There's no denying that there is some amount of cost pressure on account of escalating raw material and commodity prices but at the same time companies like SBI has taken a hit for this quarter. Margins for Q1FY06 were high because of inclusion of gains due to exceptional item, which was missing this quarter leading to a sharp fall in margins."

Conversely, in Maruti margins have shot up on the back of strong growth in volumes. This volume growth has taken care of increase in costs for Maruti and we expect this to remain strong in the remaining three quarters of this fiscal.

Despite some concerns over input costs, interest rates and oil prices Choksey is confident of 25 per cent growth in earnings sustainable, barring unforeseen events. His March 2007 target for the Sensex is between 12000-12500 levels provided it crosses the 11400-hurdles after the September quarter results. He also observes that the Indian market is the only market in the world where an investor can get blue chip companies at a valuations of 12 PE on a forward basis or less, a tax-free yield of 8.5 per cent making it the most attractive of all the emerging markets.

"At 25 per cent growth at this point in time the Sensex should produce an EPS of Rs690 for FY07 and that leaves you with a PE of less than 12 on a forward basis. To that extent the Indian market compared to the other markets of the world is available at 12 or lesser PE with a tax-free yield of 8.5 per cent. Not many markets of the world are providing this kind of tax-free yield. If earnings growth sustain at this pace the Indian markets would be available at a valuation of 10 times its FY08 earnings," is how he puts forth his 12000-12500-target thesis.

Baliga, too, feels that the September quarter results could set the ball rolling for the Sensex's march towards crossing its previous high.

"One will have to wait till September quarter results, which will actually give a good visibility on the road ahead. No doubt, the Street was expecting very good results in the June quarter. If the Q2FY07 results are on track then that will act as a trigger for the market going ahead. That is what will get in the fresh FII money. That will be a beginning of the fresh run upwards again."