Covid-19 impact: Earnings shrink as more firms post results for Q1

PBT of 748 firms down 46% YoY, net sales by a quarter; manufacturers hit hard

The exuberance of early bird results has given way to a sense of worry as more companies have declared their results for the April-June quarter (Q1FY21).

The combined profit before tax (PBT) of 748 companies, which have declared their results for Q1FY21, is down 46 per cent year-on-year (YoY). Their net sales went down by a quarter as the Covid-19 lockdown led to a sharp fall in economic activity.

The numbers are, however, far worse for manufacturers, who bore the brunt of the lockdown. The combined PBT of 632 companies, excluding banks, non-banking financial companies (NBFCs), insurance and oil & gas, were down 91.4 per cent YoY while their net sales was down 25.2 per cent YoY during the quarter.

In comparison, the PBT of the first lot of 95 companies were down a modest 8.6 per cent YoY during Q1FY21 while their net sales was down just 3.4 per cent only during Q1.

Corporate earnings also look a tad better if numbers for loss-making mobile operators such as Bharti Airtel and Vodafone Idea are excluded. Excluding telecom, the combined PBT of manufacturing & IT companies was down 46.2 per cent YoY during Q1FY21 against 25.6 per cent decline in the March 2020 quarter.

Analysts, however, say that the results are much better than expected. “The Street was expecting a complete washout in corporate earnings but the actual profits and margins in most key sectors are ahead of consensus estimates despite a sharp fall in revenues," says Dhananjay Sinha, head of research at Systematic Institutional Equities.

 

 

Sinha attributed this to a sharp cut in discretionary spending by companies coupled with a collapse in global commodity and energy prices during the quarter.

The combined raw material cost for manufacturers nearly halved during the quarter, declining at double the pace of fall in revenues, while their energy or power & fuel cost was down 40 per cent during the quarter. This allowed companies to maintain operating profit margins at last year's level despite a sharp fall in sales volumes.
 

Lenders and insurance companies, however, reported an uptick in overheads and had minimal impact on their operations during the quarter.

Sectorally, it was a good quarter for lenders and IT firms such as Infosys, HCL Technologies and Wipro. The combined PBT of bank & finance companies was up 17.5 per cent during the quarter against 20.1 per cent decline in Q4FY20. Their combined revenues were up 13.6 per cent against 7.6 per cent decline in the March 2020 quarter. “Only when moratorium ends, will the true picture in the banking and NBFC space get clear,” says G Chokkalingam, founder & managing director, Equinomics Research & Advisory Services.

In comparison, IT firms reported 3 per cent growth in their PBT during the quarter while their combined net sales was up 4.1 per cent. Financial & IT companies together account for nearly 45 per cent of India Inc’s combined earnings and better show by them aided the bull-run on the bourses.

Going ahead, some analysts expect a further improvement in corporate earnings in the second quarter and beyond.

However, others caution investors about getting too excited. “Although Q1FY21 earnings are better than expectations, it should be viewed in the context of the extremely muted outlook,” write analysts at Motilal Oswal Securities.