Rally in commodities, bonds rescues India Inc in Q3

Highest net profit growth in 8 quarters at 27.7%

The October-December 2016 quarter was bittersweet for Corporate India, with lower domestic demand going hand-in-hand with higher price realisations. The results for the quarter suggest demand shock from demonetisation was more than compensated by gains from higher commodity prices and treasury gains from a bond rally in the domestic market.

The combined net profit (adjusted for exceptional gains and losses) of 1,660 companies across sectors was up 27.7 per cent on a year-on-year (YoY) basis in the third quarter, growing at the fastest pace in at least two years. Their top line showed similar buoyancy, with combined revenues (including operating and other income) for the sample up 9.2 per cent during the quarter, growing at the fastest pace in at least two years.

The growth was driven by a surge in sales realisation of energy companies, metal and sugar producers in line with the global rally in commodity prices. (See adjoining chart)

“Energy and commodity producers were expected to make gains in the third quarter but actual numbers are somewhat ahead of estimates. It seems many consumers advanced purchases, in a bid to exhaust their old currency,” says G Chokkalingam, founder & chief executive officer, Equinomics Research & Advisory.

The operating profit margin of the entire universe was up 80 basis points (bps) to 23.5 per cent over (third quarter) Q3FY16, and flat sequentially.

Excluding energy and financial sectors, India Inc’s net profit and revenue grew 26.5 per cent and seven per cent YoY, respectively.

The combined net sales of oil and gas companies in the universe, including Reliance Industries, was up 15.3 per cent YoY during the third quarter, against 24.1 per cent YoY decline during the corresponding quarter last year and 0.9 per cent YoY decline reported in the second quarter. Their operating profit and net profit (adjusted) was up 36.6 per cent and 24.5 per cent YoY, respectively, in the third quarter.

Metal, mining and sugar companies, including industry heavyweights such as Tata Steel, JSW Steel, Steel Authority of India and EID Parry (India), reported 20.2 per cent YoY growth in net sales in the third quarter, against 21.4 per cent YoY decline in revenues last year. In all, the combined net profit of the sample swung from a loss of Rs 5,597 crore in the third quarter of last financial year to a net profit of Rs 144.1 crore during the third quarter of the current financial year.

Banks, on the other, gained from a bond rally triggered by the currency purge despite corporate banks taking a hit on net interest income and bad loans. A surge in bank deposits after demonetisation led to a sudden drop in bond yields (interest rates) and a rally in bond prices boosting banks’ treasury profits. The non-interest income of banks and non-banking finance companies in the sample was up 34 per cent YoY in the third quarter, against 9.5 per cent YoY growth during the corresponding quarter a year ago. The result was a 36.6 per cent YoY growth in the sample (financials) adjusted net profit despite a tepid 5.6 per cent YoY growth in net interest income during the quarter and rise in non-performing assets of quite a few corporate banks that have declared their results so far.

Financials, energy companies and metal producers together accounted for nearly half of the revenues of the entire universe and nearly 40 per cent of combined net profits in the third quarter.

Currency invalidation took a toll on manufacturers and service sector companies serving domestic customers. Companies in these sectors reported a sudden drop in revenue and profit growth, as the cash crunch led to drying up of demand across categories. The combined profit growth for 1,058 domestic market-focused companies, where product prices are not driven as much by global prices (excluding financials, energy, information technology services, pharmaceuticals, agrochemicals, metals and sugar), was up 11.8 per cent YoY during the third quarter, down from 16 per cent growth reported in the second quarter of the current financial year. Their net sales growth decelerated to 4.4 per cent from 6.9 per cent in the second quarter of the current financial year. The numbers also suggest production cuts and no job accretion, with the combined salary and wage expenses for the sample growing at a two-year low of 4.6 per cent during the quarter.

Domestic-focused companies also took a hit on their margins, with core operating margin down 60 bps on sequential basis to 15.6 per cent (of net sales) in the third quarter due to a combination of lower demand and higher commodity prices. Margins were, however, up on a YoY basis. Every Rs 100 worth of net sales cost Rs 47.5 worth of raw material and energy in the third quarter of the current financial year, up from Rs 45.2 a year ago.

These companies together accounted for around 40 per cent of the entire sample’s revenues and nearly a third of the sample’s combined net profit in the third quarter.

Consumer companies suffered the most, with the combined net profit of fast-moving consumer goods and consumer durable companies up just 1.7 per cent in the third quarter, growing at the slowest pace in at least last two years. Their combined net sales inched up 1.8 per cent YoY in the third quarter, indicating a contraction in volumes when adjusted for consumer price inflation.

Analysts expect third quarter results to be a high point for Corporate India in the near term. “Operating margins have just begun to come under pressure due to rise in commodity prices, and it is likely to get pronounced in the next few quarters. Demand growth is tepid as it is, and it could severely dent corporate profitability in the next few quarters,” says Dhananjay Sinha, equity strategist and head-institutional equity, Emkay Global Financial Services.

Chart-1 : All Cos finances during December 2016 Quarter
			(Rs Crore)				Cost Intensity ( per cent of Net Sales)
All Cos	Total Income	PBIDT	Net Profit		PBIDTM ( per cent)	ICR	Employee Cost	Raw Materials & Energy
Mar-14	1209964.8	296470.2	95311.1		24.5	2.2	8.0	38.1
Jun-14	1144969.1	289164.1	79651.3		25.3	2.0	8.6	36.9
Sep-14	1160202.7	287246.9	75758.5		24.8	2.0	8.8	37.9
Dec-14	1137688.1	284000.2	68339.5		25.0	1.9	9.0	35.5
Mar-15	1141659.1	299973.9	83349.2		26.3	2.0	9.8	31.8
Jun-15	1108311.2	317441.8	89205.9		28.6	2.0	11.9	31.9
Sep-15	1139124.5	309357.7	86386.0		27.2	2.0	10.7	33.4
Dec-15	1119729.9	286030.8	68392.3		25.5	1.9	11.0	32.2
Mar-16	1187229.1	287414.6	66959.4		24.2	1.8	10.7	30.9
Jun-16	1151147.2	322783.0	89082.8		28.0	2.1	11.3	32.2
Sep-16	1202660.8	329112.0	89871.8		27.4	2.1	11.2	33.7
Dec-16	1222974.9	327101.4	87368.3		26.7	2.0	10.9	34.0
YoY Chg ( per cent)	Total Income	PBIDT	Net Profit
Mar-15	-5.6	1.2	-12.6
Jun-15	-3.2	9.8	12.0
Sep-15	-1.8	7.7	14.0
Dec-15	-1.6	0.7	0.1
Mar-16	4.0	-4.2	-19.7
Jun-16	3.9	1.7	-0.1
Sep-16	5.6	6.4	4.0
Dec-16	9.2	14.4	27.7
Chart-2 : Companies excluding financials and Oil & Gas
			(Rs Crore)				Cost Intensity ( per cent of Net Sales)
Ex-Financials & Energy	Net Sales	Core Opr Profit	Net Profit		Opr Margin ( per cent)	ICR	Employee Cost	Raw Materials & Energy
Mar-14	602810.4	88003.74	44804.84		14.6	5.4	11.6	38.9
Jun-14	558363.6	92579.99	41983.83		16.6	5.6	12.9	38.0
Sep-14	582587.5	93056.79	43437.08		16.0	5.5	12.8	38.4
Dec-14	586749.0	95484.52	42458.69		16.3	5.3	12.6	38.0
Mar-15	618198.7	85136.49	39607.23		13.8	5.0	12.9	37.7
Jun-15	577620.0	97766.59	45303.45		16.9	5.2	17.2	36.6
Sep-15	626822.0	97910.38	53558		15.6	5.4	14.3	39.4
Dec-15	629695.0	93399.85	40598.39		14.8	5.0	14.4	38.8
Mar-16	692199.1	106754.47	49172.38		15.4	5.5	13.5	38.1
Jun-16	651513.5	110035.79	49741.14		16.9	5.5	14.7	39.0
Sep-16	673612.1	113492.63	54023.12		16.8	5.8	14.4	39.8
Dec-16	674023.5	111850.33	51342.33		16.6	5.4	14.4	40.4
YoY Chg ( per cent)	Total Income	PBIDT	Net Profit
Mar-15	2.6	-3.3	-11.6
Jun-15	3.4	5.6	7.9
Sep-15	7.6	5.2	23.3
Dec-15	7.3	-2.2	-4.4
Mar-16	12.0	25.4	24.2
Jun-16	12.8	12.5	9.8
Sep-16	7.5	15.9	0.9
Dec-16	7.0	19.8	26.5

Chart-3 : Companies ex-Financials, energy, commodities, IT & Pharma
			(Rs Crore)				Cost Intensity ( per cent of Net Sales)
Ex- Financials, Energy, IT, Pharma & Metals			Adj Net Profit		OPM ( per cent)	ICR	Employee Cost	Raw Materials & Energy
Mar-14	406363.4	53114.2	24689.0		13.1	4.4	6.5	43.1
Jun-14	370382.9	59868.0	22357.5		16.2	4.7	7.4	43.2
Sep-14	386941.0	59468.5	22727.9		15.4	4.6	7.4	44.1
Dec-14	393404.0	61769.6	23431.8		15.7	4.5	7.2	42.9
Mar-15	422282.4	62632.3	29158.4		14.8	4.8	7.0	42.1
Jun-15	390571.0	65503.7	26747.3		16.8	4.6	7.8	42.0
Sep-15	434777.9	66456.2	28347.2		15.3	4.6	7.2	46.3
Dec-15	442102.9	66927.9	25880.9		15.1	4.7	7.2	45.2
Mar-16	485618.9	78013.8	34257.1		16.1	5.2	6.6	44.4
Jun-16	451707.2	75233.7	31070.2		16.7	4.9	7.4	46.4
Sep-16	464624.8	75369.9	32894.1		16.2	5.3	7.2	47.5
Dec-16	461606.2	71992.7	28928.6		15.6	4.7	7.2	47.5
YoY Chg ( per cent)	Total Income	PBIDT	Net Profit
Mar-15	3.9	17.9	18.1
Jun-15	5.5	9.4	19.6
Sep-15	12.4	11.8	24.7
Dec-15	12.4	8.4	10.5
Mar-16	15.0	24.6	17.5
Jun-16	15.7	14.9	16.2
Sep-16	6.9	13.4	16.0
Dec-16	4.4	7.6	11.8
Note: All Cos : 1660 Companies; Core Operating profit excludes other operating and other income; Adjusted net profit excludes exceptional gains & losses
Bank & Finance Net Sales are Interest Earned
Source: Capitaline
Compiled by BS Research Bureau