Illustration: Ajay Mohanty
The earnings season for the first quarter (Q1) of 2018-19 has started on a strong note for Corporate India. The combined net profit of 113 companies that have declared their results for the April-June 2018 quarter was up 20.3 per cent on a year-on-year (YoY) basis, growing at the fastest pace in the last nine quarters.
Combined net sales
(net interest income in the case of bank and financials) were up 17.6 per cent YoY — the best in at least three years (see adjoining chart
Growth got a boost from a favourable base effect and better-than-expected show by Tata Consultancy Services
(TCS), which accounted for 28.4 per cent of all incremental profit growth for the sample during the quarter. The momentum was, however, missing in the other two large information technology
(IT) firms in the sample — Infosys and Wipro — as they reported low single-digit growth in earnings during the quarter, while TCS’ profit grew 24 per cent YoY. TCS
accounted for 86 per cent of the incremental earnings growth of all IT companies in our sample, against its 55 per cent share in the sector’s total profits.
Sample companies’ net profit was up 5.6 per cent YoY during the corresponding quarter last fiscal year, while net sales
were up 5.7 per cent in the June quarter last year. Growth was adversely affected last year as traders and consumers had postponed purchases in Q1 of 2017-18 due to the roll-out of the goods and services tax
(GST) in July 2017.
Earnings also got a boost from a strong showing by private sector lenders
such as Kotak Mahindra Bank, Bajaj Finance, L&T Finance Holdings, and IndusInd Bank
— all of whom reported higher earnings growth than the sample average.
In all, top five companies — TCS, HDFC Bank, Kotak Mahindra Bank, Bajaj Finserv, and Hindustan Unilever
— together accounted for two-thirds of the sample companies’ incremental earnings growth during the quarter, against their 55 per cent share in total profits in the quarter.
The analysis is based on a constant sample of 113 companies which have declared their results for the April-June 2018 quarter and excludes listed subsidiaries of listed holding and operating companies such as Bajaj Finserv.
The 2018-19 fiscal has also started on an encouraging note for the manufacturing sector, especially consumer goods makers. The combined net profit of 92 companies, excluding financials and IT companies, was up 14.7 per cent YoY during the quarter, growing at the fastest pace in the last nine quarters, while their combined net sales
was up 23.7 per cent, the best in at least three years.
In the manufacturing space, growth was led by Ashok Leyland, Hindustan Unilever, Havells, Bajaj Auto and tyremakers such as JK Tyre and Ceat. In contrast, the country’s top cement maker, UltraTech Cement, disappointed with 31.4 per cent YoY decline in its net profit during the quarter.
As top line growth recovers from the disruption caused by demonetisation in November 2016 and GST roll-out, manufacturers reported improvement in operating margins despite creeping rise in raw materials and energy costs (as percentage of net sales).
At 14.9 per cent of net sales, core operating margins for ex-financials and IT companies was at least at a four-year high. Analysts attribute this to operational leverage as demand recovers in the economy. “Consumer goods companies and related sectors are expected to grow faster in 2018-19 driven by greater fiscal spending by the central government and some boost from a recovery in international trade. A faster top line growth is likely to boost margins as companies spread their fixed costs over larger volumes,” said Dhananjay Sinha, head of research, Emkay Global Financial Services.
- the single-largest component in terms of total profits of the early bird sample – are, however, not as lucky and companies reported a further decline in margins in the quarter due to growing mismatch between the industry’s top line growth and rise in salaries and wages.
At 23.4 per cent of net sales, the combined core operating margins for IT exporters
was the lowest in at least 16 quarters. Early bird numbers should, however, be taken with a pinch of salt as some of the biggest manufacturers and consumer goods companies such as ITC, Tata Motors, Maruti Suzuki, Mahindra & Mahindra, Asian Paints, and Sun Pharma, among others, are yet to declare their results.
The sample does not include large capital goods makers (Larsen & Toubro, Siemens) and commodity and energy companies (Reliance Industries, Indian Oil, Oil and Natural Gas, Tata Steel, Hindalco, NTPC, and PowerGrid).