Retail lenders, RIL help India Inc's combined net profit rise 8.6% in Q2

Boosted by a better show by retail lenders, Reliance Industries (RIL), metal companies, and consumer goods makers, the second quarter (Q2) earnings season has started on a positive note for India Inc.

The combined net profit of 228 companies that have declared their results for the July-September 2017 quarter so far was up 8.6 per cent year-on-year (YoY), against 1.3 per cent growth during the first quarter (Q1) of the current financial year (FY18) and 7.9 per cent YoY growth during the corresponding quarter a year ago.

The sample includes 23 Nifty50 Index companies, and their combined net profit was up 6.8 per cent during the quarter - a big improvement from the 1.3 per cent decline during the June 2017 quarter.

Mid- and small-cap companies seem to have done better than top-tier companies that form part of the index. The combined net profit of non-index companies was up 18.9 per cent YoY during the quarter, broadly in line with 18.7 per cent growth during Q1 of FY18 and a big jump from a tepid 1.4 per cent YoY growth during Q2 of the last fiscal year (FY17).

Analysts say that this is part of a cyclical improvement in growth and corporate earnings, aided by fiscal stimulus and an improvement in global growth conditions. “A mild cyclical improvement is expected in economic growth and earnings, as the government has stepped up spending this year and global demand conditions are more benign than a year ago. But there are question marks over the sustainability of the current performance and it may dissipate over the next few quarters,” says Dhananjay Sinha, head of research, Emkay Global Financial Services.

On the revenue side, early birds show that large companies continue to gain from reflation in commodity and energy prices and restocking post the roll-out of the goods and services tax (GST) in July this year. While the former has translated into higher unit prices and revenues across the manufacturing value chain, restocking helped consumer goods makers such as Hindustan Unilever, ITC, Asian Paints, Maruti Suzuki, Bajaj Auto, Whirlpool India, and TTK Prestige report better-than-expected volume and revenue growth during Q2. The gains were, however, uneven, with some electrical goods makers posting tepid volume growth due to GST-related issues.

Consumer goods makers also gained from an early Diwali this year. Last year, a large part of the pre-Diwali boost in volumes and revenues accrued in the corporate results for the third quarter (Q3) of FY17; this year, the bulk of pre-Diwali demand boost accrued during Q2 itself.

The combined net sales of the entire sample were up 12.4 per cent – a three-quarter low, but up from 5.5 per cent growth during the corresponding quarter in FY17. The combined net sales of three oil and gas companies in the sample, including RIL, was up 15 per cent YoY during Q2 - a three-quarter low, but a big improvement from 0.1 per cent YoY decline during the corresponding quarter last year.

The headline numbers, however, largely reflect the performance of private sector banks, oil and gas companies, and software exporters, as these three sectors together account for three-quarters of the early birds’ combined net profit of around Rs 62,700 crore during the quarter.

Excluding banks, financials, oil and gas firms, the combined net profit was up 5.6 per cent YoY during quarter, a slight improvement from 4.6 per cent YoY growth during Q1, but down sharply from 11.3 per cent growth during Q2 last year. The trend in their revenues was a little more encouraging, with combined net sales up 8.5 per cent - the highest in the last six quarters.

This is largely due to sequential improvement in the top and bottom line growth of information technology (IT) firms such as Tata Consultancy Services, Infosys, Wipro, and HCL Technologies. IT exporters’ rupee revenues and margins received a mild boost from the rupee depreciation against the dollar during the quarter. However, the sector as a whole remains a laggard, with low single-digit growth in net sales (up 3.1 per cent YoY) and net profit (up 2.5 per cent).

Domestic market-focused manufacturers and service providers reported double-digit growth in net profit and net sales boosted by post-GST restocking and an early Diwali this year. The combined net profit of companies, excluding financials, energy, IT, metals, and mining was up 16.7 per cent during the quarter - a two-quarter high and better than 14.7 per cent YoY growth during the corresponding quarter a year ago.

Their combined net sales were up 13.1 per cent - the highest in at least 12 quarters. However, the early bird sample for domestic market-focused companies is small and many large companies in capital goods, construction, infrastructure, automobile, telecom, and power are yet to declare their results for Q2 of FY18.

Private sector banks and retail lending non-banking finance companies were the show-stoppers during the quarter, with 12.5 per cent YoY growth in net profit and 19.3 per cent YoY growth in net interest income during the quarter.

The long-term outlook for the sector, however, has been marred by a rise in bad loans for some of the private-sector lenders.