Early birds score on sales, falter on profits; RIL props up Q4 earnings

Axis Bank no-show weighs on combined net profit growth

The March quarter earnings of companies which have reported results so far are a case of robust top line growth. Led by a 38 per cent increase clocked by Reliance Industries (RIL), net sales growth of 136 companies at nearly 18 per cent has been the highest in at least 12 quarters. Top line growth has been secular and even without RIL, revenue growth is the highest in six quarters.

The disappointment, however, is on the net profit front largely owing to muted showing by the banking and financials space, which, coupled with information technology (IT) companies, dominates the early bird list of companies to report results. 

Combined net profit growth came in at just 2.7 per cent for the 136 companies due to the Rs 21.88 billion loss posted by Axis Bank, compared to the Rs 12.25 billion profit it had posted in the year-ago quarter. Exclude Axis Bank and bottom line growth has been a respectable 8.6 per cent. Even here, RIL has been the show-stopper; its 17.3 per cent increase in net profit growth helped overshadow the muted showing of the banking segment. Without RIL’s profits, the aggregate net profit would have fallen by 1.3 per cent, compared to the year-ago quarter.

The aggregate numbers of 106 companies, excluding RIL and banking firms, indicate interest costs have risen faster, compared to operating profit growth, both on a year-on-year basis and sequentially.

Also read: Q4 results: RIL posts record profit of Rs 94.35 bn; Jio's net at Rs 5.10 bn  

A closer look within sectors provides some interesting trends though. Within finance, for instance, private lenders such as HDFC Bank, YES Bank, and IndusInd Bank posted profit growth of 20-29 per cent, while non-banking finance companies’ (NBFCs’) combined net profit grew by 27 per cent, on a year-on-year basis. Likewise, within cement, UltraTech Cement’s 39 per cent fall in net profit, which was impacted by exceptional items, pulled down the sector's performance, offsetting the 18-30 per cent rise in profits of ACC and Shree Cement. Similarly, Wipro’s weak show was a drag for the IT sector. Telecom majors, Bharti Airtel and Idea Cellular also posted a weak show, with Airtel’s net profit falling 10 per cent, while Idea’s loss rising almost threefold, on a year-on-year basis. On the other hand, realty firm, Indiabulls Real Estate saw a sharp surge in net profit in the fourth quarter at Rs 16.48 billion, from Rs 600 million in the year-ago period, adding to the aggregate numbers.

However, there is a silver lining. Market experts such as Sanjeev Zarbade, vice-president, PCG Research, at Kotak Securities, says barring Axis Bank, all the companies in the BSE 30 Index (which have announced results) reported earnings ahead of estimates. Yogesh Mehta, vice-president at Motilal Oswal Securities (MOSL), agrees. He says most companies reported in-line performance and the trend is encouraging. He highlights two disappointments: One is the guidance of Infosys; the other is the large loss of Axis Bank. 

Given the early trends, analysts say the FY19 earnings estimates may see some upside. The reason for the optimism, according to Gaurav Dua, head of research at Sharekhan, is that there have been more upgrades than downgrades seen during the early part of the earnings season. Though the early trends are good, barring an Axis, Infosys, and Maruti’s margins, Rakesh Tarway of Reliance Securities believes a clear trend will emerge as the earnings season progresses. 

Others such as G Chokkalingam at Equinomics Research & Advisory remain watchful as they believe that the performance has been on a low base of 2017.

Despite the Axis no-show in the quarter, most experts remain positive on private banks, with Mehta of MOSL preferring NBFCs as well. The key triggers for the Street include a normal monsoon, which will play an important role as it is expected to boost rural consumption. If this comes through, agriculture, discretionary spends, two-wheelers, and building materials stocks could see a higher demand from investors. 

Mahindra & Mahindra, Shriram Transport Finance, IndusInd Bank, Dabur, and Britannia figure on the list of beneficiaries, according to Mehta, who, however, remains cautious on pharma, given the regulatory overhang as well as public sector banks due to non-performing assets and muted credit growth.
 

According to Dua of Sharekhan, confidence in the growth of IT players has increased during the current results season.