Subpar performance: Q4 revenue improves, profit under pressure

Double-digit sales growth, operating margin at 16-quarter lows

India Inc revenues grew in double digits for the second consecutive quarter in the January-March 2018 period (Q4FY18) though net profit disappointed.

Sales growth for companies, excluding financials and energy, was at 10.3 per cent, marginally lower than the 11.4 per cent year-on-year (YoY) growth reported in the December 2017 quarter, and was the third highest in 16 quarters. 

However, India Inc failed to impress on the earnings front. The combined net profit (adjusted for exceptional gains and losses) of companies, ex-financials and energy, was down 14.4 per cent YoY during the quarter, their worst showing in the last four years. Profitability was pulled down by lower operating margins, lower-than-expected volume growth, and a higher interest burden for manufacturing companies during the quarter.   

Combined net sales grew as consumer demand meant higher volumes, but there are signs of pricing pressure as companies were not able to pass on the costs.

A similar trend was visible in the case of domestic market-focused companies — the set excluding financials, energy, metals, mining, information technology services, and pharmaceuticals. Their top line growth decelerated to 11.5 per cent in Q4FY18, from 12.9 per cent growth a quarter ago (see adjoining chart).

Analysts say this may make it challenging for Corporate India to report faster growth in 2018-19, given that macroeconomic conditions are likely to be much tougher for both the government and consumers this year. “Government finances and consumers’ wallets are likely to face the heat of the recent spike in energy prices and bond yields (interest rates) hitting demand growth during the current fiscal year,” says Dhananjay Sinha, head of research, Emkay Global Financial Services.

Rating agency CRISIL, however, sees early signs of economic recovery in the quarterly earnings when read in conjunction with the latest gross domestic product (GDP) numbers. “The economy is recovering well post the implementation of the goods and services tax last year, given steps from the government to resolve glitches,” the rating agency said in a report.

The analysis is based on the quarterly results of a common sample of 1,653 companies, whose numbers were available for the last 20 quarters.

Domestic market-focused companies reported a net profit growth of 4.8 per cent during the March quarter, a sharp deceleration from 12.4 per cent growth a year ago and 22 per cent growth in the December 2017 quarter.

The combined net profit of companies, ex-financials and energy companies, was down 0.5 per cent in 2017-18, against 10.2 per cent growth in 2016-17, the worst in four years. Domestic companies’ earnings was up 7.7 per cent in 2017-18, their worst show in the last three years and down from 13.7 per cent growth a year ago. For the entire sample of 1,653 companies, net profit was down 13.3 per cent to a four-year low of Rs 3,894 billion on a trailing 12-month basis. “Commodity prices bottomed out in early 2016, translating into higher corporate margins in 2016-17. Now the cycle is reversing, hitting corporate profitability,” says G Chokkalingam, founder & managing director, Equinomics Research & Advisory Services.

The core operating margin (excluding the impact of other income) for companies, ex-financials and energy, was down 350 basis points (bps) on a sequential basis to 12.5 per cent of net sales during the March quarter, the lowest in at least four years. The ratio was 13.9 per cent of net sales a year ago. One bps is one-hundredth of a per cent. Margins for domestic companies were down 130 bps on a sequential basis to 13.1 per cent of net sales, down from 14.4 per cent during the third quarter (Q3). The ratio was 12.9 per cent during Q4 of last fiscal year. Analysts expect margins to remain under pressure in 2018-19, given the recent rise in energy prices and rupee depreciation. “It will be tough for companies to translate top line growth into faster earnings, given their higher input prices and companies’ low pricing power,” says Sinha.

Analysts say consumer demand is the only bright spot for Corporate India, but its sustainability is doubtful, given the stagnation in corporate investment and poor export growth, which translates into a poor job market. “Final consumption expenditure improved to 8.1 per cent in Q4FY18, from 6 per cent in Q3, mostly supported by 16.8 per cent YoY rise in government consumption expenditure in Q4 (up from 6.8 per cent in Q3). This could be attributed to Pay Commission hikes being implemented by different states,” said CRISIL in its commentary on GDP estimates for March 2018 quarter.

The combined net sales of fast-moving consumer goods and consumer durable companies were up 8.7 per cent YoY, down from 11.6 per cent growth during the December 2017 quarter. Their combined net profit was up 12.1 per cent YoY in Q4, down from 19.1 per cent growth in Q3.

The weak Q4 performance now raises the possibility of a cut in earnings estimates for 2018-19. Dalal Street is currently working with 23 per cent YoY growth in the underlying earnings per share of Nifty50 index companies. This could see a revision after this earnings season.