Earnings improve, but not yet in high gear; India Inc net up 10.6% in Q3

Information technology services and pharma, India's two biggest exporting sectors, continue to face headwinds

A year after demonetisation-induced economic disruption, corporate earnings are yet to move into high gear as expected by the Street. Companies focused on the domestic market, especially consumer goods players, have recovered some of their mojo in the third quarter ended December 2017 (Q3FY18), but their numbers, too, fail to sizzle despite a favourable or low base-effect. Worse, on the cost side, higher energy and commodity prices have begun to bite domestic manufacturers, with companies reporting an increase in per unit cost of raw materials and energy.

 

The combined net profit of the 1,395 companies, which have declared their results for the October-December 2017 period, was up 10.6 per cent year-on-year (YoY), much lower than the 28.6 per cent YoY growth witnessed during the corresponding quarter last fiscal year (FY17). This is despite their combined net sales going up 14.6 per cent YoY, the fastest growth in the last 13 quarters. In comparison, net sales were up 7.4 per cent YoY for the quarter ended December 2016, while it had increased by 10.5 per cent YoY during the July-September 2017 period.
 

Excluding the banks & financials and energy sectors, the combined net profit of 1,130 companies was up 14.9 per cent YoY in Q3FY18, much lower than the 21.8 per cent YoY growth clocked in the year-ago quarter, but better than the 7.9 per cent YoY growth seen in the second quarter of the current fiscal year (Q2FY18). Their combined net sales were up 12.4 per cent YoY, fastest growth in the last 15 quarters.
 
The top companies, however, disappointed with lower-than-expected growth in profit and revenue in Q3FY18. The combined net profit of 45 companies, which are part of the Nifty50 index, was up 12 per cent YoY, on a 13.8 per cent YoY increase in net sales. This was lower than the Street’s YoY growth estimates of 15.4 per cent and 15.3 per cent for Nifty companies’ net profit and net sales, respectively, for the quarter. Some of the index companies missing in our sample include Oil and Natural Gas Corporation, Ambuja Cements, Sun Pharmaceutical, Coal India, and GAIL (India).
 

In comparison, the combined market capitalisation of index companies (in our sample) is up 30 per cent in the last one year even after considering last week’s correction.
 
The numbers have been adjusted for the listed subsidiaries of companies such as Vedanta, Tata Steel, Larsen & Toubro, and Bajaj Finserv. Net sales for banks and non-banking finance companies refer to net interest income (interest earned minus interest expended).
 
India’s two biggest exporting sectors, information technology (IT) services and pharma, however, continue to face headwinds. IT exporters such as TCS, Infosys, and Wipro reported low single digit growth in net profit and revenues for the sixth consecutive quarter. The combined net profit of pharma companies was down 17.6 per cent YoY; their profits have declined in five out of the last seven quarters.
 
On the bright side, the quarter saw an uptick in growth of domestic manufacturers, especially consumer goods and automakers. Retail lenders and commodity producers, including energy and metal companies, were the real engines of corporate earnings, reporting a strong double-digit growth in revenues and profits. The combined net interest income of lenders was up 21.8 per cent YoY for the quarter, fastest growth in at least last five years. Their combined net profit, however, was down 18.8 per cent YoY due to the net loss of Rs 24.16 billion reported by State Bank of India (SBI) during the quarter. Though not strictly comparable as SBI has merged its associate banks with itself from April 1, 2016, the country’s largest bank had reported a profit of Rs 26.10 billion in the year-ago period.
 
The combined net sales of crude oil refiners, including public sector oil marketing companies, was up 17.8 per cent YoY in Q3, while their net profit was up 30 per cent YoY.
 
In line with the surge in global metal prices, combined net profit of metal and mining companies doubled in Q3 over the year-ago period, while their net sales surged 25.6 per cent YoY.
 
In comparison to global cyclicals, domestic manufacturers had a relatively muted quarter, which was still better than their recent performance. The combined net sales of domestic-focused companies (excluding financials, energy, IT, metal & mining, pharma, and Tata Motors) was up 11.5 per cent YoY in Q3, ahead of 8.5 per cent YoY growth clocked in the year-ago period. Their combined net sales were up 10.9 per cent YoY, up from 1.4 per cent YoY growth seen in Q3FY17.
 
As anticipated, higher raw commodity and energy prices have now begun to bite Corporate India. However, its negative impact on margins was cushioned by slower growth in employee costs as well as interest and depreciation charges. For domestic manufacturers, every Rs 100 worth of net sales consumed Rs 39.8 worth of raw material and energy, up from Rs 39.1 a year ago and Rs 38.7 during Q2FY18. In the same period, the burden of salary and wages declined to 7.67 per cent of revenues, from 7.75 per cent a year ago and 7.77 per cent in the previous quarter.
 
Analysts expect consumer companies and retail lenders to retain the current growth momentum driven by strong government spending, especially in rural areas. However, it is doubtful if the ensuing growth will be enough to justify the current stock prices.