Earnings lessons

Consumption improving, but investment is not

The investment cycle has not yet recovered, if one goes by the earnings trends for the fourth-quarter (Q4, or March 2015) and full-year (2014-15) results. Retail consumption demand may be recovering, given the way automobiles, telecom and fast-moving consumer goods (FMCG) have outperformed. But in contrast, there has been a poor show in metals and cement and muted performance from information technology, textiles and pharmaceuticals. The dichotomy in banking performance best illustrates the patchy nature of the results. Public sector banks have large exposures to core industry and infrastructure, while private banks focus more on retail and fee-based services. In the fourth quarter of 2014-15, banking has seen an overall nine per cent rise in net profit with 20 per cent year-on-year rise in revenue; but that is largely due to the private banks. The 11 private banks in the sample generated 47 per cent of revenue while delivering 31 per cent revenue growth, and 35 per cent rise in profit. The 10 PSU banks saw a 10 per cent rise in revenue, and a steep 59 per cent drop in profit due to high provisioning for sticky assets.

Overall, sales and profits growth across a list of 480 listed companies hit two-year lows. Sales were down 2.4 per cent. Operating profit was down seven per cent and net profit adjusted for extraordinary items was only 1.2 per cent higher. Key adjustments include the huge impairment of Rs 19.956 crore for Vedanta, and the one-time payout of Rs 2,628 crore that TCS gave to its employees. The FMCG sector saw a 15 per cent increase in net profit with major companies like Godrej, Dabur, Glaxo and Gillette hitting double-digit rises in profit. The dominant Hind Unilever recorded nine per cent growth in both revenue and profit. In the automobile segment, Maruti delivered a splendid performance with higher sales (12 per cent rise in revenue) coupled to lower yen-denominated costs and a 61 per cent rise in net profit. Telecom majors, Airtel and Idea have both seen revenue growth and rising net profit, driven by higher smartphone penetration and more data consumption. The strong rupee may have impeded exports. The 37 software outfits in the sample, including majors like TCS. Infosys, HCL Tech, Wipro, Mindtree, saw eight per cent higher revenue and rupee profit going up by 9.8 per cent. In pharmaceuticals, adjusting for Biocon's offloading of Syngene, the 24 companies in the sample have seen only a 5.6 per cent rise in net profit.

The performance has been poor in textiles, realty, cement and metals. Textiles, which also has an export-oriented profile, has seen 13 per cent profit erosion. Realty (where several majors are yet to report their numbers) has seen profits drop 17 per cent. In cement, where most of the majors have reported results, profits have fallen by 26 per cent while sales have dipped by 21 per cent. Quite a few large public sector undertakings, notably in the energy sector, are yet to declare results. But if this trend holds, it would seem that consumption is improving while manufacturing, construction, infrastructure and the core sector are still suffering. Projections don't suggest much in the way of improvement in the first half of the current financial year.