Profitability gets a boost in June quarter

Operating margins for ex-finance and oil companies at 4-year high

Pricing power, as well as low prices of energy and raw materials, continued to be the wind in the sails of corporate India for the April to June quarter (Q1) this financial year (2016-17, or FY17).

Thanks to lower input cost, operating margins reached a new high despite companies’ inability to ramp-up volume growth, as anticipated.

The combined net profit (adjusted for exceptional items) of 1,002 companies was up 5.3 per cent year-on-year (y-o-y) in Q1 FY16, against the 7.5 per cent y-o-y decline during the January-March 2016 quarter and 3.2 per cent y-o-y growth during the corresponding quarter a year ago.

The combined net sales for the sample was up 4.1 per cent y-o-y during the quarter against 5.3 per cent y-o-y growth during the previous quarter and 2 per cent decline during the corresponding quarter a year ago.

The analysis is based on the Q1 results of 1,002 companies, whose comparable numbers were available for the last 16 quarters.

The sample excludes the results of Vedanta, Kotak Mahindra Bank and Piramal Enterprises as their numbers have been impacted by mergers and acquisitions during the period. Net sales for banks and financial companies is net interest margins; for others it is gross sales minus indirect taxes.

Gains from lower commodity and energy prices were most visible in the results of companies, excluding banks and financial firms, as well as oil and gas companies. The combined net profit for 816 companies, excluding financial and energy firms was 12.5 per cent on y-o-y — down from 15.5 per cent y-o-y growth during the previous quarter and 9.7 per cent y-o-y growth during the corresponding period a year ago.

The combined net sales for the sample was up 7.2 per cent y-o-y during the quarter marginally down from 7.5 per cent y-o-y growth in the preceding quarter but better than 4.9 per cent during the corresponding quarter a year ago.

The core-operating profit (excluding other income) for the sample was up 12.8 per cent, a sharp deceleration from 21.6 per cent growth recorded in the previous quarter.

At 18.3 per cent of the net sales, the core operating margins for companies ex-financials and energy was at a four-year high. The margins were up 130 basis points on sequential basis and 90 basis points on year-on-year basis. One basis point is one-hundredth of a per cent.

The input intensity including power & fuel and purchase of finished goods declined to four year low of 36.2 per cent of net sales during the April-June 2016 quarter. The ratio was 37.3 per cent in the preceding quarter and 38.2 per cent a year ago.

Biggest gains from lower input cost was visible in the sectors such as cement, steel, auto and auto ancillaries, paints, consumer durables, and chemicals among others. Not surprisingly the  top performers during the quarter such as UltraTech Cement, Ambuja Cement, JSW Cement, UPL, Eicher Motors, Exide, Titan, Voltas, Kansai Nerolac, Asian Paints and Havells among others reported high double growth in net profits.

In contrast, companies with high labour intensity of production such as IT services took a hit on margins from a combination of low volume growth and a further rise in labour cost.

Employee cost for IT exporters such as TCS, Infosys, Wipro and HCL Tech among others rose to all time high of a 51.6 per cent of net sales during the quarter up from 50.8 per cent in the preceding quarter. In other words, every Rs 100 worth of industry’s revenues cost Rs 51.6 (Rs 50.8 in the previous quarter). The analysis excludes the April-June 2015 quarter when employee cost was inflated by one-time employee bonus paid by TCS.

As a result, the core operating margins for IT companies in the sample declined to 25.3 per cent of the net sales during the quarter down 90 basis points on sequential basis.

IT services were the single biggest sector in the sample accounting for nearly 18 per cent of the sample combined net sales and nearly quarter of the sample adjusted net profit profits. The results is however is still not representative of the entire corporate India as many of the manufacturing heavy weights such as Bharat Heavy Electrical, Tata Motors, Tata Steel, Hindalco, NTPC, Coal India, Tata Power, GAIL, Sun Pharma, Indian Oil and Bharat Petroleum Corporation are yet to declare their results for the quarter.