Earnings growth worries

India Inc's show comes as a damper

The July-September 2017 earnings of India Inc were muted as companies struggled to adjust to the goods and services tax that rolled out on July 1. While revenue growth was the second best in three years, profitability proved to be a major concern. The combined net profit for 1,852 companies declined by 2.6 per cent, year-on-year (YoY), even as revenue grew by 8.7 per cent. The financial and energy sectors propped up the overall numbers; excluding them, revenue growth was just 6.9 per cent while net profit plummeted by 6.9 per cent as increasing raw material and employee costs also crimped profitability. A further disaggregation of the data reveals that large-cap companies did better than the small- and mid-sized ones, thanks to the strong performance by companies in refining, finance, automobiles and metals. Large companies were also able to withstand the changes caused by demonetisation and the GST better than smaller players. The combined net profit of the Nifty 50 companies was up 12.1 per cent during the quarter as against a 0.3 per cent decline during the first quarter of the current financial year and a 1.3 per cent growth during the corresponding quarter a year ago. The Nifty companies account for 80.1 per cent of the net profits of the entire sample, up from 78.8 per cent a year ago.

There were some redeeming features as well. Bank slippages were lower during the second quarter of this financial year and non-performing assets did not rise by as much as in the past. Volumes in consumer-facing businesses, such as automobiles, recovered from the lows of the April quarter as distributors and dealers started restocking after the implementation of the GST to target an early festive season this year. The earnings season also saw analysts raising their estimates of Nifty stocks to around 10 per cent for 2017-18 and 20 per cent-plus for 2018-19. This was a surprising change from the sharp cuts to consensus earnings every quarter in the recent past. Analysts said the number of Nifty companies that missed their estimates fell to its lowest in the last three years. Around a quarter of the Nifty 50 companies missed consensus earnings expectations, while a little under half were in line.

The past three years have seen ambitious earnings forecasts at the beginning of the year followed by sharp cuts to the forecasts as the year progressed. Analysts are projecting strong earnings growth of 10 per cent and 20 per cent-plus (consensus) for the current and next financial years, respectively. However, not all agree with the consensus as they give more credit to the early Diwali, GST benefits and a weak base in the July-September 2016 quarter. A section of the analysts are raising concerns about a downgrade redux and believe that current consensus estimates will be cut over the next few quarters. Some brokerages have already scaled down their earnings estimated by about 25-30 per cent from the consensus estimate for both 2017-18 and 2018-19. The upgrades in consensus earnings in the second quarter have seen the stock market rally continue, but the latest concerns leave the market vulnerable to negative surprises.