Q2 Results are Robust, and FII Inflows will take the market to new highs.

Profits perk up in Q2 as input cost pressure eases

First set of 250 cos sustain first quarter sales drive.

Non-financial services companies managed to register a healthier growth in profits during the second, September 2010, quarter compared with the first.
This is revealed by an analysis of an initial set of 250 companies that have announced the results. In the second quarter, the net profit of companies expanded 16 per cent compared with the same period last year. In contrast, the profits for the same set of companies grew by a marginally lower 14 per cent in the first, June, quarter (year-on-year).
These companies expanded their sales by 21 per cent in the September quarter, carrying on the momentum established in June, when sales expanded by 23 per cent.
Margin Picture
Raw material cost pressures, which were high in the preceding quarter, seem to have abated a bit. The cost of raw materials as a percentage of sales dipped to 41 per cent in September quarter against 42 per cent in June 2010. This suggests that either commodity prices have moderated or companies managed to pass on the hike in input prices to customers. Operating margins (excluding the ‘other income' component) however contracted by a percentage point to 17.7 per cent, suggesting a rise in other expenses.
The quarter also saw corporates continuing to get some respite on interest costs, despite the firm trends in market interest rates. Interest outgo fell from 1.8 per cent of sales in the June 2010 quarter to 1.6 per cent in September.
This, to some extent, helped arrest the contraction in net profit margins. After adjusting for extraordinary items, profit margins were 11.6 per cent this quarter against 12.3 per cent in June 2010.
Topsy turvy
The sales and profit performances in the current quarter are also in sharp contrast to what was reported in the same period last year. Sales then grew by a more modest nine per cent but a better control on costs saw a sharp rise (20 per cent) in net profits.
From the companies that have so far declared their results, frontline software companies have fared well, bettering market expectations on performance. IT companies have reported strong flow of new orders that are also larger in size . The performance of mid-tier IT and cement companies has been disappointing.
The earnings picture may also change substantially as sectors such as telecom and FMCGs report their numbers. These sectors had to contend with a comparatively difficult business fundamentals during the second quarter.