Corporate earnings down 0.1% YoY in March quarter due to slowdown in demand

Analysts attribute the poor corporate earnings to a slowdown in aggregate demand in the economy
After reporting positive earnings growth for five consecutive quarters, corporate earnings were flat in the January-March 2019 quarter. The combined net profit of 1,869 companies, excluding financials and energy, was down 0.1 per cent year-on-year (YoY) during the January-March 2019 quarter — their worst showing in the last six quarters. In comparison, earnings were up 18.7 per cent YoY during the fourth quarter (Q4) of 2017-18 and 7.7 per cent YoY during the October-December 2018 quarter. 

Earnings were hit by a combination of lower demand growth and relatively fast growth in interest, depreciation, and tax outgo during the quarter, erasing the gains from a sharp improvement in operating margins on a YoY basis. The companies’ interest payments were up 15.3 per cent and direct taxes grew 19.7 per cent during the quarter. 

In comparison, their combined net sales were up 8.9 per cent YoY during Q4 of 2018-19 (FY19), expanding at the slowest pace in the last five quarters.  

The core operating margin (excluding other income) for the sample was up 220 basis points (bps) on a YoY basis to 11.7 per cent of net sales in Q4FY19. One basis point is one-hundredth of a per cent.

Together, these companies reported a net profit of around Rs 91,000 crore, marginally lower than the record high of Rs 91,093 crore a year ago. 

Analysts attribute the poor corporate earnings to a slowdown in aggregate demand in the economy. “The latest gross domestic product data and automobile sales suggest a sharp deceleration in private consumption demand as well as capital expenditure in the economy. This has hit the top line and earnings growth for companies across sectors,” 

says G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services. 

He expects this negative trend to persist for at least another two quarters, given the YoY rise in energy prices in the international markets and disruption in global trade, including withdrawal of India’s preferential trade status by the US — India’s largest exports market. 

The move by the US is likely to hit export-oriented companies in sectors such as pharmaceuticals, auto ancillaries, textile and garments, gems and jewellery, and engineering goods, among others.

The index companies performed relatively better, thanks to a turnaround in the profitability of corporate and public sector banks (PSBs). 

The combined net profit of top 50 listed companies that are part of the Nifty50 index was up 19.5 per cent YoY to a record high of Rs 99,116 crore in the March 2019 quarter. In comparison, Nifty companies’ earnings were up 3.8 per cent YoY a year ago and 5.4 per cent during the third quarter (Q3) of FY19. This is lower than the Street expectations of 23.7 per cent growth in Nifty earnings during Q4FY19.

Nifty companies, however, reported sharp deceleration in revenue growth, in line with the overall demand slowdown in the economy. The combined revenues of Nifty50 companies were up 9 per cent YoY during the January-March 2019 quarter, growing at the slowest pace in the last 10 quarters. 

The combined profit for the entire sample of 2,273 companies across sectors was up 39.2 per cent YoY, driven by a low-base effect and better showing by corporate banks such as State Bank of India, Axis Bank, and ICICI Bank, among others. Earnings for all companies were down 24.9 per cent YoY during the March 2018 quarter due to large losses posted by PSBs. The companies’ revenues were up 9.2 per cent YoY, growing at the slowest pace in the last six quarters.

Some of the key sectors reporting a decline in aggregate net profit include oil and gas, metals and mining, non-banking financial companies, automobiles, and pharmaceuticals. 

In contrast, information technology (IT) majors such as Tata Consultancy Services and Infosys, and fast-moving consumer goods companies such as Hindustan Unilever, ITC, and Asian Paints were star performers during the quarter, with double-digit growth in earnings despite a slowdown in top line growth on a sequential basis. 

The IT sector’s combined net profit was up 17.9 per cent, growing at the fastest pace in three years. Earnings were driven by gains from rupee depreciation, which allowed companies to compensate for a steady rise in employee cost — their key cost head. The industry’s combined net sales were up 14.6 per cent YoY, down from a three-year high growth rate of 16 per cent during Q3FY19. The consumer companies’ combined net profit was up 18.7 per cent during the quarter, the best in the last three quarters, driven by a relatively slower growth in interest, depreciation and direct taxes during the quarter. This more than compensated for the YoY and quarter-on-quarter decline in the industry’s operating margins 

during the quarter. The industry’s core operating profit was up just 4.7 per cent during Q4, growing at the slowest pace in the last seven quarters. Their net sales growth at 10.2 per cent was the lowest in last four quarters.

Together, these two defensive sectors accounted for a bulk of the incremental growth in the earnings of non-financials and non-energy companies during the March 2019 quarter. Analysts say it will be tough for these sectors to improve total corporate earnings in the forthcoming quarters, given the slowdown in both global economy and consumer demand in India.


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