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Top 50 large-cap companies may report worst aggregate top line growth in two years

MUMBAI: India's 50 most frequently traded large-cap companies are likely to report the worst aggregate top line growth in two years in the quarter to March on lower spending by consumers, although operating margins have improved.

According to the ET Intelligence Group's forecast of these companies, which constitute the popular 
Nifty 50 Index, aggregate sales are expected to grow by 4% from a year ago while net profit will rise by 5%. Sales are likely to grow at the slowest pace in nine quarters. In the previous quarter, at 9.4%, revenue growth fell below 10% for the first time in two years. 

The trend of subdued growth over the past two quarters will take at least six months to reverse, according to analysts. Earnings growth has been subdued in an economy that many economists and analysts reckon grew at one of the slowest pace in a decade last fiscal. Governance issues, 
inflation and high interest rates have also weighed down many companies although the government has said FY14 could mark the start of a rebound in growth.

"We expect the results to be a mixed bag as growth is slowing down considerably. Sectors such as cement, industrials and automobiles can disappoint while IT and pharma can throw up some positive surprises," said Sohini Andani, fund manager at SBIBSE 0.36 % Mutual Fund. 

With demand slackening and corporates hesitant to make large investments because of policy uncertainty, governance and execution issues, the only positive is in the form of sustained operating profitability. At 19.8%, operating margins will be 150 basis points better than a year ago. "Margins can hold up well on...cost cutting by companies," said Harsha Upadhyaya, senior vice-president and head (equities), Kotak Mutual Fund. Apart from cost control and lower raw material expenses, higher operating profits of select companies, including 
Asian PaintsBSE -0.69 %, Cairn IndiaBSE -0.21 %, GailBSE 1.94 %, Reliance Infrastructure and Tata PowerBSE 0.79 % will boost aggregate margin, the ETIG analysis indicates. 

Also, there are indications of a stable trend in interest outgo as a proportion or percentage of revenue. This ratio is expected to remain at about 12% for the fourth consecutive quarter after peaking at 12.3% in the September 2012 quarter. "We may see some moderation in interest costs for the March quarter, considering the recent rate cuts by the Reserve 
Bank of India," said Saurabh Mukherjea, head of institutional equities, Ambit Capital. The central bank cut rates by 25 basis points in March, and there are hopes of a further reduction of 50 basis points this fiscal once inflation moderates. 

The trend of slower sales growth is likely to continue in the medium term, according to some analysts. 
Bank of America Merrill Lynch, for instance, said in a recent report that analysts are being too optimistic about a recovery in the economy on the back of a sustained fall in interest rates. "So far, rate cuts have been slow and we think sales growth in FY14 will continue to be weak. Hence, the expected recovery in margins may disappoint," the report said. 

Auto companies are likely to take a knock in the March 2013 quarter due to demand slump. Barring M&M, whose utility vehicles sales will help the company post a decent earnings growth, most companies are expected to report negligible top line growth and leaner margins. Twowheeler makers, such as 
Bajaj AutoBSE 1.57 % and Hero MotoCorpBSE 0.77 %, will post subdued numbers as sales volumes remained lower compared with a year ago. 

The banking sector will continue to plagued by concerns over asset quality. Though slippages will be in line with the last quarter, new restructured loans could be higher adding to provisioning costs, especially for state-owned banks, given their exposure to large stressed corporate accounts that will hurt profitability. Their earnings growth will also moderate as loan expansion has been muted due to the poor investment climate.