India Inc Q2 earnings growth highest in 7 quarters, combined net up 16.2%

Metals and mining companies topped the earnings growth chart, with 151% growth in the sector's combined net profit during Q2

Corporate India reported a good set of numbers during the July-September 2018 quarter, thanks to gains from a low base during the corresponding quarter last fiscal year and a better-than-expected showing by metals and mining firms.

The combined net profit of 1,889 companies across sectors was up 16.2 per cent year-on-year (YoY) during the second quarter (Q2) of 2018-19, growing at the fastest pace in the last seven quarters. Earnings were down 10.8 per cent YoY during Q2 of last fiscal year.

In rupee terms, the combined net profit grew to Rs 1.15 trillion, a number last seen during the first half of 2015-16. Quarterly corporate profits had fluctuated between Rs 724 billion and Rs 1.12 trillion in the previous 16 quarters. Companies’ combined revenues were up 19.6 per cent YoY during Q2, the best in at least three years. Nearly 60 per cent of incremental growth in the top line was accounted for by oil and gas companies and metals and mining firms, in line with the recent surge in energy and metal prices.

The combined net sales of energy companies, including Reliance Industries, were up 48 per cent YoY, while metals and mining companies' net sales were up 23 per cent during the quarter.

“The net profit margin witnessed a marginal contraction during the quarter, but it has been observed that some industries have been picking up momentum, leaving behind the demonetisation and goods and services tax (GST) impact that hit their growth and earnings last fiscal year,” says Madan Sabnavis, chief economist, CARE Ratings.

Metals and mining companies also topped the earnings growth chart, with 151 per cent growth in the sector’s combined net profit during Q2, led by Coal India and Tata Steel, which reported a large positive swing in profits during the quarter.

The combined net profit of companies, excluding banks, financials, and energy, was up 29.2 per cent YoY during the quarter, enhanced by a lower base during the corresponding quarter a year ago.

The sample companies' combined net profit was down 14.9 per cent YoY during Q2 of 2017-18. In rupee terms, combined net profit grew to Rs 770 billion, against Rs 596 billion a year ago and Rs 737 billion three months ago.

Numbers suggest the domestic manufacturers seem to have finally recovered the ground lost to the twin shocks of demonetisation and the roll-out of the GST. The combined net profit of companies' ex-financials, energy, metals and mining, information technology (IT), and pharmaceuticals was up 24.8 per cent YoY during Q2, marginally down from 26.6 per cent YoY growth reported during the first quarter of the current fiscal year. This universe of companies constitutes domestic-focused manufacturers. The earnings growth among domestic manufacturers was led by infrastructure companies, capital goods makers, electrode manufacturers, packaging companies, and logistics firms, among others.

In contrast cement, automobile makers, auto ancillaries, consumer durables makers, airlines, and media and entertainment companies' disappointed investors with lower than expected earnings growth. Earnings in the domestic manufacturing sector were negatively affected by companies' inability to pass on the rise in input cost, hurting their margins. Domestic manufacturers' core operating margin (excluding other income) was down 150 basis points on a YoY basis, led by rise in raw materials and energy costs. Among individual companies, the biggest positive swing in profits was reported by Alok Industries (Rs 4.1 billion), State Bank of India (Rs 3.6 billion), Oil and Natural Gas Corporation (Rs 3.1 billion), Ruchi Soya Industries (Rs 2.9 billion), and Coal India (Rs 2.7 billion).

At the other end of the spectrum, the negative swing in profits was reported by Punjab National Bank, IDBI Bank, Tata Motors, and Vodafone India, which reported losses between Rs 3.3 billion and Rs 5.1 billion in Q2. "The September corporate earnings report season was broadly in line with our expectations as far as the Nifty earnings are concerned. However, our universe numbers missed our expectations, entirely attributed to disappointments from public sector banks and telecom sectors," writes Gautam Duggad of Motilal Oswal Securities.

He says that while the underlying earnings story is improving (better revenue growth trends, corporate banks' asset quality turning around, among others), new risks to earnings are also emerging (automobiles and retail non-banking finance companies, among others). Consequently, the direction of the earnings revision is still trending down.