 "Economic slowdown hits domestic market-focused companies")
The bullish sentiment of Dalal Street was missing from corporate results for the last quarter of financial year 2016-17. These reflected the tepid 6.1 per cent economic growth released on Thursday.
The combined net profit of 1,860 companies (excluding financials, and oil and gas) was down 6.7 per cent year-on-year (y-o-y) during the January-March 2017 quarter, the lowest in nine quarters. In comparison, net profit for the sample was up 30.4 per cent during the corresponding quarter in the previous financial year, and 13.1 per cent in the December 2016 quarter.
Net sales was up 5.9 per cent y-o-y, marginally higher than the 5.8 per cent growth recorded in the third quarter but down from 10.2 per cent growth in the corresponding quarter last year. (See chart)
A larger universe of 2,264 companies (including financials and energy) showed better numbers but even here firms reported a sharp deceleration in earnings from the third quarter. The combined net profit for these was up 20.3 per cent y-o-y, against 31.4 per cent y-o-y growth in the third quarter and 20.3 per cent y-o-y decline during Q4 FY16. Many public sector banks had reported losses in the March 2016 quarter after the Reserve Bank of India told them to conduct an asset quality review, and these banks reported profit in the March 2017 quarter.
The analysis also excludes a few companies such as Vedanta and Strides, whose financials are not comparable because of mergers, acquisitions, asset sales or large one-time write-downs. If these companies are included, net profit growth shoots up to 66.2 per cent y-o-y in the March 2017 quarter. Vedanta, for example, had reported a record loss of around Rs 21,000 crore in Q4 FY16 due to a one-time write-down in the value of its investment in Cairn India, while Strides Shasun was formed after Shasun Pharmaceuticals merged with Strides Arcolab.
The numbers were worse for domestic market-focused companies — excluding information technology (IT), pharmaceuticals, metals and mining, energy and financial firms. Their combined net profit declined by 19.2 per cent y-o-y in the fourth quarter, the worst in past three years. Their combined net sales growth at 3.3 per cent was lowest in seven quarters.
Analysts attribute this to a combination of slower top-line growth and a steady rise in input costs, including raw materials and employee costs. G Chokkalingam, founder and chief executive officer at Equinomics Research & Advisory, said, “The economy faces a deep industrial slowdown and this has negatively impacted the earnings of domestic market-focused companies. Just look at the core sector data, which remains depressed.”
Kotak Institutional Equity described the Nifty 50’s fourth quarter performance as “hollow-beat”. “The results look strong on paper with net profit of the Nifty50 Index exceeding our estimates by 9 per cent. However, the beat is largely due to strong performance in overseas operations of Tata Motors; large adventitious gains in the case of Bharat Petroleum and Indian Oil, and high other income in the case of Oil and Natural Gas Corporation. Underlying drivers for most sectors continue to be weak, which has led to further earnings downgrades,” wrote the brokerage in its result analysis.
According to Credit Suisse, which analysed the BSE100 companies, the headline growth numbers looked good but corporate India’s internals remained weak. “Aggregate BSE100 sales growth at 9 per cent y-o-y was the highest in 11 quarters, but excluding metal and oil companies’ growth was 4 per cent, the lowest since March 2009 quarter. Metal companies contributed to 40 per cent of the BSE100 revenue growth, Reliance Industries 28 per cent and financials 24 per cent. Similarly, BSE100 EBIT (earnings before interest and tax) growth in Q4 FY17 was 39 per cent y-o-y, but excluding financials that had several one-offs in the base, growth was just 7 per cent, with all sectors except metals, financials and IT (information technology) seeing EBIT decline. A third of the companies saw EBIT fall,” wrote C S Neelkanth Mishra in his report on fourth quarter results.
Operating costs showed a greater buoyancy with the sample companies’ combined raw material costs rising 10.1 per cent y-o-y during the quarter, while salary and wages were up 8.7 per cent. The end result was a contraction in operating margin, which hit a nine-quarter low. The core-operating margin (excluding other income and other operating income) at 13.3 per cent (of net sales) was down 130 basis points on a y-o-y basis and 200 basis points sequentially. Every Rs 100 worth of net sales cost Rs 36.1 of raw materials during the March 2016 quarter, up from Rs 34.7, a year ago. Employee cost as a proportion of net sales was up 40 basis points on a y-o-y basis to 12.9 per cent, though it was down 40 bps sequentially. One bps is one-hundredth of a per cent. A combination of lower growth and higher operating costs resulted in core operating margin falling to a 16-quarter low of 12.5 per cent (of net sales) in Q4 FY17, down 190 bps on the sequential basis and 220 bps on the annualised one.
Going forward, analysts expect a cyclical upturn in corporate earnings in FY18 driven by an improvement in commodity producers and consumption-oriented companies in manufacturing and financial services sector. While the former are likely to gain from higher commodity and energy prices, the latter would benefit from an expected fiscal stimulus by the central government in the second half of the current financial year. In the short-term however, there could be hiccups due to a likely de-stocking by manufacturers across the board to prepare their channel for migration to goods and services tax.