Little to cheer about in early bird results

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There are few signs of optimism in the early-bird corporate results for the January-March 2017 quarter. Profit growth decelerated during the fourth quarter (Q4) of FY17, compared to the third quarter (Q3) and firms took a knock on their margins due to a sharp rise in raw material costs. 

A net profit growth would have been even lower, if not for a decline in the tax outgo — the first in three years — and a double-digit jump in other income, thanks to a rally in the bond market. The combined net profit of 135 companies that have declared their results for Q4 was up 8.6 per cent year-on-year (YoY) during the quarter, down from 10.3 per cent YoY growth in Q3 and 16.2 per cent growth during the corresponding period a year ago. 

On a full-year basis, FY17 has been the worst in the last three years for this sample, with 7.2 per cent earnings growth, down from 15.6 per cent a year ago. (See adjoining chart)

The combined revenue was up 17.6 per cent YoY in the quarter — growing at the fastest pace in at least three years, largely driven by the rise in revenues of Reliance Industries (RIL) and Hindustan Zinc (HZL) due to recovery in oil prices and metal prices, respectively.

RIL’s net sales were up 42 per cent YoY during the quarter and it accounted for 71 per cent of the entire sample’s incremental growth during the quarter. HZL’s net sales nearly doubled during the quarter on a YoY basis, thanks to a sharp jump in global zinc prices in the last 12 months. 

The results of the top listed companies were also below expectation, with the combined net profit of 13 Nifty50 companies in the sample rising 5.9 per cent in Q4, down from 21.4 per cent YoY growth during the corresponding quarter last fiscal. In comparison, brokerages have estimated Nifty50 companies to report 15.3 per cent growth in net profit during Q4. 

The underperformance was largely due to lower-than-expected profit growth by Maruti Suzuki and information technology (IT) majors such as Tata Consultancy Services and Infosys. Results by private sector banks such as HDFC Bank, IndusInd Bank, YES Bank and Axis Bank, on the other hand, were largely along expected lines.

Other income and lower taxes were the biggest earning drivers, helping corporates offset higher raw materials costs and slower demand growth in many sectors. The combined other income, including treasury income, was up 15.3 per cent YoY, while the effective corporate tax rate was down 210 basis points (bps) on a YoY basis and 190 bps over the December 2016 quarter. 

This was the third consecutive quarterly decline in the corporate tax rate. Companies in the sample paid 25 per cent of their pre-tax profits as tax, against 26.9 per cent during Q3 and 27.1 per cent a year ago.

Analysts attribute this to higher tax provision in the previous quarters. “Most companies made higher tax provisions at the beginning of FY17, expecting recovery in earnings. As actual earnings turned out to be lower, companies paid less tax in the second half to account for higher advance tax paid earlier,” says G Chokkalingam, founder & chief executive officer, Equinomics Research & Advisory Services. 

Gains from lower interest rates are most visible in the results of banking and non-banking financial services companies (NBFCs). 

The combined net interest income of 37 banks and NBFCs in the sample was up 23.5 per cent YoY during the quarter, nearly twice as fast as the underlying growth in gross interest income. Interest expense was 5.2 per cent YoY in Q4, rising at its slowest pace in the last three years. 

A bond rally triggered by lower interest boost banks’ other income that was up 33.5 per cent YoY, leading to 10.5 per cent YoY growth in net profit in Q4, against a flat growth in the previous two quarters.

Analysts expect the gains to dissipate, going forward. “Bond yields have since hardened and could rise further, negatively impacting banks’ income from bond trading in the forthcoming quarters,” says Dhananjay Sinha, head-institutional equity, Emkay Global Financial Services.

Stripping out the gains from other income, the core operating profit growth slowed down to 4.3 per cent, lowest in at least three years. Core operating margin (excluding other income) for the sample declined to a 10-quarter low of 27.5 per cent (of net sales), down 350 bps on a YoY basis and 140 bps, sequentially. One basis point is one-hundredth of a per cent. Raw material cost was up nearly 480 bps YoY to 25.8 per cent of net sales for the entire sample. 

It was a washout quarter for IT exporters, with lowest revenue and profit growth in at least three years. Net sales were up 3.8 per cent in Q4, against 17.7 per cent a year ago, while their net profit was flat, against double-digit growth a year ago. Together, IT companies account for nearly a third of the entire sample’s combined net profit of around Rs 39,500 crore in Q4.

The domestic market-focused companies showed the pressure on account of demonetisation, with 6.4 per cent YoY growth in net sales during the quarter, up from 3.4 per cent growth in the December quarter, but down from 10.6 per cent top line growth a year ago. 

Their combined operating profit was up 2.3 per cent YoY, growing at the slowest pace in the last nine quarters. The sample excludes banks and financials, RIL, IT firms and metal producers.

All eyes are now on earnings of public sector banks and large manufacturing companies such as Tata Motors, Tata Steel, Bharat Heavy Electricals, Larsen & Toubro and National Thermal Power Corporation, among others. Analysts, however, say there is only a small probability of earnings trajectory changing, given the headwinds facing Corporate India.



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