y-o-y, the slowest pace in at least three years. Growth in revenue is also significantly lower than the increase of 28.1 per cent a year ago and 17.2 per cent during the first quarter of FY20, pointing to the ongoing slowdown in the economy. This also raises doubts about the sustainability of the earnings growth beyond a few quarters once the benefit of the tax rate cut fades.
Apart from the tax rate cut, earnings growth for Q2 has also been driven by margin expansion.
Earnings before interest, tax, depreciation and amortisation (Ebitda), or operating profit margin, is up 320 basis points (bps) on a y-o-y basis due to a decline in spend on raw materials and power & fuel. Raw material costs for companies
are down 13.8 per cent, while power and fuel costs are down 4 per cent y-o-y during the second quarter. Analysts attribute this to a mix of lower production volumes and the recent decline in commodity and energy prices.
Margins also got a boost from a moderation in sales and marketing as well as overhead costs, as companies
put brakes on discretionary spends as part of cost-saving measures.
However, the early birds’ sample is limited in scope as nearly 80 per cent of the profits accounted for by private sector banks, retail NBFCs, Reliance Industries, and IT services exporters such as TCS, Infosys and Wipro.
Most of the large companies in sectors worst affected by the slowdown such as automobile, capital goods, consumer dura-bles, metals & mining, and infra are yet to declare their results.
The combined tax outgo for the September quarter is down 3.1 per cent y-o-y. As a result, the average effective rate of tax for the sample of 200 firms has declined to 22.9 per cent during Q2FY20, as against 28.5 per cent in the year-ago quarter.
In all, the tax cut has boosted post-tax earnings by around Rs 3,900 crore, equivalent to 5.6 per cent of their pre-tax profit of the September 2019 quarter. The net savings for companies are lower at around Rs 1,600 crore due to a sharp 177 per cent y-o-y jump in their deferred tax outgo.
Many firms, including Reliance Industries, Hindustan Unilever, and Tata Consultancy Services, have reported a sharp jump in deferred tax outgo, negating a part of the gains from the tax cut. Including deferred tax, the effective rate of tax during the quarter is down to 28.9 per cent against 31.1 per cent a year ago. "The corporate earnings so far have been on the predicted lines with gains from lower tax outgo and lower operating costs. The demand environment, however, continues to disappoint and all eyes are now on the second half of the current fiscal," says Dhananjay Sinha, chief strategist and economist, IDFC Securities.
The stress on top line is most visible in the non-financials space. The combined net sales (ex-banks & NBFCs) are up just 2.9 per cent y-o-y during Q2, a sharp deceleration from 34.2 per cent y-o-y growth a year ago and even the 14.9 per cent y-o-y growth reported for Q1FY20. "Ignoring the gains from the tax cut and lower operating costs which are one-off in nature, the stress continues for corporate India. Volume growth has been missing for most firms and top line growth is likely to remain under pressure as the economy faces a deflationary condition with whole price index (WPI) now close to zero," says G Chokkalingam, founder & MD, Equinomics Research & Advisory Services.
It was, however, a good quarter for retail-focused lenders with the combined net interest income for private sector banks and NBFCs in the sample up 23.7 per cent y-o-y during the quarter, while net profit is up 18.8 per cent. IT services exporters, however, reported a sharp deceleration in volume growth, with their combined net sales up just 6.6 per cent y-o-y during the Q2FY20 — the worst in the past six quarters. Net profit growth at 3.4 per cent y-o-y is also the lowest in the past six quarters. The industry has reported y-o-y contraction in margins as the share of salary and wages in total revenue has inched up due to lower volume growth.