India Inc's combined net profit down 2.6% led by telcos, textile firms

Festival sales and restocking of goods after the goods and services tax (GST) roll-out provided some relief to corporate India during the July-September quarter, but the gains were not enough to completely erase the losses caused by the note ban and the new indirect tax system.

While consumer companies and large manufacturers recovered some of their mojo during the second quarter, investment-related sectors and second-tier manufacturers continue to struggle with a flat-to-low-single-digit growth in their top line and a decline in earnings.

The combined net profit of all 1,852 companies in the sample was down 2.6 per cent year-on-year (YoY), better than a 10.3 per cent YoY decline in the first quarter. In the September 2016 quarter, however, profit grew at 5.6 per cent.

The combined net sales for entire universe was up 8.7 per cent against an 8.3 per cent growth in the June 2017 quarter and 4.2 per cent growth in the corresponding quarter a year ago.

If financials, oil and gas companies are excluded, the combined net profit of 1,431 companies was down 6.9 per cent YoY during the second quarter of FY18, better than the 13.3 per cent YoY decline in the first quarter but worse than 8.2 per cent growth in earnings during the corresponding quarter last financial year.

It was largely due to a poor show by telecom operators, capital goods makers, auto ancillaries, and textile companies, among others.

Net sales growth at 6.9 per cent for this segment was the fastest in the past five quarters. The improvement in top line growth was led by metal and mining companies and consumer goods makers, which are witnessing a reflation in their revenues, thanks to recent rise in commodity prices.

The quarter belonged to large firms and industry leaders with Nifty50 companies’ superior top line and bottom line growth than their smaller peers. The combined net profit of Nifty50 firms was up 12.1 per cent YoY during the quarter, a sharp improvement from 0.3 per cent decline during the first quarter of the current fiscal year and 1.3 per cent growth during the corresponding quarter a year ago.

Nifty companies now account for 80.1 per cent of the net profit of the entire sample, up from 78.8 per cent a year.

UBS Securities said Nifty earnings and revenue growth were lower than its expectations in its report on Nifty 50 results. Nifty earnings in Q2 FY18 grew 14 per cent YoY, an impressive headline number, but a bit below our and consensus expectations.

Index companies’ combined revenue was up 11.5 per cent against 10.5 per cent growth during the first quarter and 3.8 per cent growth a year ago. While Nifty companies’ net profit growth was ahead of market estimates, top line growth was below street expectations.

Of the 60 broad industry groups covered in the sample, 37 reported YoY growth in net profit during the quarter, while companies in 23 industries saw decline in earnings on year-on-year basis.

Some of the key industries to report growth in earnings include oil and gas, automobile, metal and mining, consumer durables, construction and infrastructure, aviation, gems and jewellery, chemicals and petrochemicals, among others. At the other end of the spectrum, earnings declined in sectors such as corporate banks, capital goods, telecom, power, auto ancillaries, tyres, textiles, hotels and edible oil, among others.

Consumer companies – fast moving consumer goods, passenger cars, consumer durables, two-wheelers, fashion and footwear, alcoholic and non-alcoholic beverages were among the top performers during the second quarter followed by metal companies, crude oil refiners and retail lenders.

Consumer companies’ combined net profit was up 15.6 per cent during the quarter, down from 21.9 per cent growth a year ago but a sharp turnaround from 2.1 per cent growth in earnings during the first quarter of current fiscal. Their combined net sales were up 11.7 per cent growing at the fastest pace in last three years.

As has been the case in the past few quarters, a decline in raw material cost was one of the biggest earnings drivers during the quarter.

For companies ex-financials and energy, expenses on raw materials and energy (as a per cent of net sales) were down 30 basis points (bps) YoY and 50 bps sequentially to 39.1 per cent of net sales during the second quarter. One basis point is one-hundredth of a per cent.

The gains were even bigger for consumer companies with expenses on raw materials and energy (as a proportion of net sales) declining by 206 basis points YoY and 133 basis points quarter-on-quarter. The result was a nearly 190 bps q-o-q expansion in consumer companies’ core-operating margin and 40 bps YoY expansion.

Analysts expect a partial reversal in gains in the forthcoming quarters due to a steady rise in metal and crude oil prices. “I expect an uptick in raw material and energy costs for manufacturers beginning third quarter leading to margin pressure for companies,” says Dhananjay Sinha, head of research at Emkay Global Financial Services.