June Quarter Results: Good show continues

Monsoon, Pay Commission and government spending to aid corporate growth in next three quarters

Corporate earnings improved during the April-June 2016 quarter, driven by higher volumes in manufacturing sectors and continued gains from lower prices of raw materials and energy.

Combined net sales for around 1,600 companies, excluding the financial and oil & gas sectors, was up 6.4 per cent year-on-year (y-o-y), during the first quarter of FY17, growing at the fastest pace in the last six quarters. The combined net profit for the sample was up 11.7 per cent y-o-y during the quarter, down from 79 per cent y-o-y growth in the preceding quarter, but it kept the hopes of bulls on Dalal Street alive.

Lower input prices resulted in a further decline in corporate India's input costs while core-operating margin (excluding other income) at 19.8 per cent of net sales was at a four-year high. Every Rs 100 worth of net sales cost Rs 39.7 worth of raw materials in the quarter ended June, down from a high of Rs 46.7 in the quarter ended December 2012.

Corporate India, however, continues to feel the effect of higher consumer inflation through a creeping rise in employee costs. Every Rs 100 worth of net sales cost Rs 14.9 worth of salaries, nearly 50 per cent higher than four-year low of Rs 9.5 per cent in the December 2012 quarter. This wage inflation could start biting once gains from lower input costs start to fade later this year. For the software sector, this is already an issue. (Click here for detail story)

Banks, on the other hand, continue to battle bad loans and slow credit growth, but the intensity of the problem seems to have softened. The sector's combined net profit was down for the third consecutive quarter, but the worst seems to be behind.

Consumer demand from good monsoon, Pay Commission awards and government spending will drive corporate growth for the next three quarters. The bull run on Dalal Street may last for a while.