Q4 results: Early birds disappoint; combined net of 104 firms down 0.5%

The January-March 2019 period was expected to be a redeeming quarter for Corporate India and make up for the weak financial performance in the first three quarters of 2018-19 (FY19). However, if 104 early-bird companies’ earnings for fourth quarter (Q4) of FY19 are an indication, India Inc is then staring at another washout year in FY19. 

The combined net profit of these companies across sectors is down 0.5 per cent year-on-year (YoY) during the quarter, their worst showing in at least three years. The numbers exclude exceptional gains and losses (see chart).

In comparison, brokerages estimated Nifty50 companies’ net profit to grow 23.6 per cent YoY during Q4, while Bloomberg consensus estimates BSE 500 companies to report 45 per cent growth in earnings.

The companies’ combined revenue is up 12.9 per cent during the quarter, growing at the slowest pace in the last nine quarters. On a trailing four-quarter basis, this is the first sequential decline in net profit in 14 quarters, indicating the extent of financial and operational challenges being faced by Corporate India.

The numbers look even worse if financials and the largest private sector company, Reliance Industries (RIL), are excluded. Without these, the combined net profit is down 1.2 per cent, their worst showing in 11 quarters, while their net sales are up 
13.7 per cent, growing at the slowest pace in the last seven quarters.

With the combined net profit of around Rs 42,600 crore during the January-March 2019 quarter, the early-bird firms represent nearly 40 per cent of Corporate India in rupee terms. The sample includes some of the industry leaders such as RIL, Tata Consultancy Services, Infosys, HDFC Bank, UltraTech Cement, Maruti Suzuki, Hero MotoCorp, Axis Bank, Indiabulls Housing Finance, ACC, Biocon, Piramal Enterprises, and Wipro. Analysts blame the disappointing corporate numbers on poor performance by retail non-bank lenders and consumer goods firms, especially automakers.

“Non-banking financial companies (NBFCs) have been hit badly by a liquidity crunch in the system, while automakers are facing the heat from a sharp slowdown in consumer demand, especially in urban areas,” says G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services. The combined net profit of banks and NBFCs in the early-bird sample was down 9.2 per cent YoY, their worst show in nine quarters, while revenue growth at 21.9 per cent was at a three-quarter low. Incidentally, non-bank retail lenders and consumer goods makers were the key growth drivers for corporate earnings in the last two years, making up for the poor show by investment- and export-related sectors.

Others also bring the issue of rural distress and recent slowdown in global trade. “The corporate results in Q4FY19 would be adversely affected by the spillover effects of rural distress and weakness in global trade. The former has now begun to weigh on demand for small-ticket consumer goods hitting fast-moving consumer goods (FMCG) companies, while the latter has affected all export- and import-related companies,” said Dhananjay Sinha, head of research, Emkay Global Financial Services, in a recent report. 

World trade volumes were down 2 per cent the March 2019 quarter. Despite the recent rate cuts by the central bank, interest rates were higher YoY on a weighted basis in Q4, which has hurt India Inc. Interest payment was the fastest-growing cost head during the quarter, with companies’ combined interest payments up 32.5 per cent YoY, against 12.9 per cent growth in revenue and 5.8 per cent growth in operating profit. As a result, interest coverage ratio was down to a 17-quarter low of 2.7x, while interest-to-revenue ratio was at a record high of 10.8 per cent. The interest burden was most visible among lenders and in RIL. RIL’s interest coverage ratio hit a 17-quarter low of 4.9x during Q4FY19, while interest payment accounted for a record 3.5 per cent of its net sales during the quarter. RIL accounts for a little over a third of the sample companies’ combined revenues and a fourth of their net profits during the quarter.

The earnings picture is likely to change as more companies declare their results in the coming days, but analysts expect the earnings trajectory to remain downwards. Corporate earnings are expected to be pulled down by sectors, which have a large weight, such as automobiles, telecom, capital goods, power, public sector banks, and infrastructure, among others.

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