Early bird results show unlocking gains, net profit of 104 firms rises 9.8%

Cement makers and metal producers clearly show the impact of an uptick in prices of their products and a fall in costs boosting their profitability

The gains from the unlocking of the Indian economy are visible in the early bird results for the September 2020 quarter (Q2).

The combined net profit of 104 companies that have declared results so far is up 9.8 per cent year-on-year (YoY) in Q2, a sharp turnaround from the earnings contraction seen in the previous two quarters. The combined net profit of the sample companies was down 3.4 per cent during Q1FY21, while it had grown by 20.1 per cent in the September 2019 quarter.

As cities opened for businesses, it benefitted the top line of companies. The combined net sales (interest income in the case of banks and non-bank lenders) of these early bird companies grew by 5.6 per cent YoY, as against a 3.3 per cent decline during the June quarter and 7.6 per cent growth during the September quarter last year. 

The positive impact of the lifting of the economic lockdown during Q2 is most visible in the results of traditional manufacturing and service sector companies. 

The combined net profit of 76 manufacturing and service sector companies (excluding banks and IT services exporters) was up 23.2 per cent YoY during Q2, against earnings contraction in the previous three quarters. These companies’ net profit was down 41.3 per cent YoY in June 2020 quarter and by 31.4 per cent in the March quarter. Their combined net sales was up 4.5 per cent YoY during Q2 — the fastest growth in the last five quarters. In the previous two quarters, these companies had posted 23 per cent and 11.6 per cent contraction in top line, due to the lockdowns imposed to curb the spread of coronavirus.

Banks and IT services exporters were least impacted by the curbs as they were allowed to operate normally, unlike manufacturers, most of whom faced closures.

Analysts, however, remain cautious about the growth prospects of India Inc. “Earnings look good on a year-on-year basis, but volumes are still down in key sectors such as cement, indicating a tepid demand scenario in the economy. The earnings recovery has largely come from price increases and lower raw material and energy costs, which may not sustain for long," said G Chokkalingam, founder & MD, Equinomics Research.

He also cautioned investors that they should not read too much into the early bird results, given the small sample size. “A majority of companies is yet to declare their results ,and good results are declared first every quarter. It would be premature to draw any conclusion based on these numbers,” he said.

There are around 5,000 listed companies in India, out of which around 3,500 are operationally active and report quarterly results. The early bird sample has 8 companies that are part of the Nifty 50 index. Cement makers and metal producers clearly show the impact of an uptick in prices of their products and fall in costs, boosting their profitability.

ACC’s net sales was flat YoY, while its raw material cost was down by a quarter. Thus, its operating profit was up 17 per cent and net profit by 20 per cent YoY in the September quarter. Zinc and lead producer Hindustan Zinc showed a dichotomy between volume and profitability. In fact, metal producers such as Hindustan Zinc, Tata Steel BSL, Tata Steel Long, and Monnet Ispat topped the charts with strong double-digit growth in net sales. In contrast biggies such as HDFC Bank, Tata Consultancy Services, Infosys, HCL Technologies, Wipro, and Avenue Supermarts either reported low single digit growth in revenue or a decline in their top line compared to the year-ago period.

Compared to the June quarter, however, HDFC Bank, Infosys, HCL Technologies, Britannia, Wipro, and L&T Infotech reported a moderation in their top line growth. Food and consumer goods makers such as Hindustan Unilever and Britannia are in the middle with high single-digit growth in net sales and double-digit growth in earnings, thanks to gains from lower costs including raw materials.

For others, however, early bird results confirm the post-Covid economic recovery.

“Most results have been on the expected line and confirms the steady improvement in economic and financial condition after a virtual shutdown in the economy during the June quarter,” said Dhananjay Sinha, head of research at Systematix Institutional Equity.

This, he said, had provided support to the current rally on Dalal Street. The Nifty50 index is up 5 per cent since the beginning of this month.