Corporate India sees earnings rebound after sharp fall in March quarter

After a disastrous fourth quarter of 2017-18 (FY18), when corporate earnings declined by a fifth led by corporate banks, 2018-19 (FY19) has started on an optimistic note for Corporate India.

The combined net profit of 2,271 companies, whose first quarter (Q1) results are available, was up 7.9 per cent year-on-year (YoY) during the April-June 2018 period, the best in past five quarters. Top line growth was even better at 18.7 per cent YoY, growing at the fastest pace in at least three years.

The sample companies’ combined net profit at Rs 1,086 billion was the highest in the last 16 quarters and ahead of the previous record of Rs 1,082 billion reported two years ago in April-June 2016. Companies’ combined net sales (net interest income for banks and non-banking finance companies) of Rs 17.3 trillion was up 28 per cent in the last two years.

Analysts attribute this to economic expansion after deflation induced first by the decline in global commodity prices, and then, demonetisation and the roll-out of the goods and services tax (GST) in July last year.

“The economy is going through reflation induced by rising commodity prices and greater public expenditure. This is translating into rising revenue and an uptick in profitability,” said Dhananjay Sinha, head of research, Emkay Global Financial Services.

He said he expected the trend to continue for a while, given the elevated commodity prices and the strong likelihood of a fiscal expansion by the central government in the run-up to the 2019 general elections.

As expected, reflation was most visible in the commodity sector — oil and gas producers, metal and mining companies, and their user industries (automobiles, capital goods, consumer durables, among others).

Energy and metal or mining companies were among the top performers during the quarter, with 43.4 per cent and 147 per cent YoY growth, respectively, in net profit during the quarter. The two sectors together accounted for nearly 59 per cent of the Corporate India’s incremental net sales growth during the Q1 and nearly all of the incremental profit growth.

The combined net profit of companies, excluding financials and energy, was up 24.9 per cent YoY in the quarter, the best in at least three years led by companies from metals and mining, consumer goods, capital goods, pharmaceuticals, and information technology services sectors. The sample’s combined net sales was up 12.9 per cent YoY, growing at the fastest pace in at least 12 quarters.

The quarter also saw growth recovery in domestic market-focused companies but the buoyancy in their earnings was less than that in the commodity companies. The combined net profit of companies (ex-energy, financials, IT, pharma and metal and mining) was up 17.3 per cent YoY, growing at the fastest pace in last seven quarters, while their combined net sales was up 9.5 per cent YoY — the best in the past eight quarters.

Consumer companies have been the toast of Dalal Street in the current earnings season and most of the companies seem to have recovered lost ground after demonetisation and the GST roll-out. But those serving discretionary consumer spending (automobiles and consumer durables) grew faster than staples - personal care, food, and tobacco companies.  

A surge in big-ticket consumer spending was aided by a surge in retail lending, especially non-banking lenders such as Housing Development Finance Corporation, Bajaj Finance, Capital First, M&M Financial, and Bharat Financial among others.

The combined net profit of non-banking finance companies was up 29 per cent YoY during the quarter, while their net interest income was up 26.6 per cent, outpacing the growth in banking sector by a big margin.

Rising commodity prices have, however, begun to eat into the margins of domestic manufacturers. Domestic companies’ raw material and energy costs as a per cent of net sales was at five quarter high in the June 2018 quarter. Its impact was most telling in the auto sector where companies failed to impress the Street despite strong double digit growth in revenues and profits.

“Investors are now worried about a steady decline in industry's margins, which could nullify the gains from higher volumes this year,” said G Chokkalingam, founder and MD, Equinomics Research & Advisory Services.

But overall, analysts expect corporate earnings in FY19 to be better than last fiscal barring any unexpected development in India’s external economic environment.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel