Q3 results meet muted expectations as margin pressure appears to ease

Market

December quarter results of top blue chips repeated a decline in operating as well as net margins, albeit at a lower pace.

While such smaller declines may be reflecting the Street's expectations that the margin recovery is around the corner, the y-o-y revenue growth of 38 Nifty companies, excluding financials and oil & gas companies, was the slowest in the last six quarters. Financials of Ranbaxy, which is expected to announce its results towards the end of February, were excluded from the analysis.

For the three months to December 2012, the operating margin of a set of 38 companies fell 59 basis points (bps) compared to the previous year, to 16.6%. On a sequential basis, however, it showed a marginal improvement of 31 bps.

The net profit margin, derived by comparing these companies reported net earnings to their total income, dipped 42 basis points to 9.7%. These declines, however, point to abating margin pressures, given that during the four quarters to June 2012, the average decline in both these margin benchmarks averaged more than 200 bps.

Analysts believe that the expectations from the December quarter numbers were not high and, to that extent, the results have met expectations. Even for topline or net sales, the consensus estimates were for 8-9% growth, which has come through. The total income also clocked in a y-o-y growth of 9% even after a strong 28% growth in the other income of these companies during the period.

"While the results are in line with expectations, after several quarters, these numbers are not expected to pull down forward earnings estimates," said an analyst.

Rakesh Arora, MD & head of research, Macquarie capital securities, pegs an increase of 100 bps in the operating or Ebitda margins, adding about 8% to the earnings growth. "The market has a potential for upgrades as declining non-food inflation and interest rate cuts would add to earnings growth," he added.

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