Good news on earnings

Early corporate results point to recovery

An analysis of the third quarter results (October-December 2017) of some 385 companies suggests that corporate growth has rebounded to an appreciable extent even if allowance is made for the low base created by the demonetisation of November 2016 as well as the patchy implementation of the goods and services tax. Sales have grown a commendable 12.8 per cent, while other income rose 28 per cent. Operating profits rose by 14.4 per cent and net profit adjusted for extraordinary items was up 23.6 per cent. Excluding banks and refineries from the sample, net profits (adjusted) have grown by 24.7 per cent, which is no mean achievement. The revival is spread across several sectors.

Also noteworthy are the improvements in the automobile ancillaries sector; for the 12 companies that have reported results, net profit is up 75 per cent and net sales are up 24 per cent. Most automobile majors (Maruti Suzuki being the exception) have not yet reported results but an improved performance by other automobile manufacturers is expected. This will be significant as cars and two-wheelers equate to big-ticket consumption. Fast-moving consumer goods companies, which represent low-ticket consumption, have also seen improvement; their net profit is up 37 per cent and sales are up 10 per cent. Another heartening performance came from the capital goods sector where sales rose by 19 per cent and net profit by 33 per cent. This might just indicate some sort of revival in the investment climate and there are early signs of revival in core industries.

The cement sector saw interesting results. Of the eight companies in the list, UltraTech Cement, saw profits falling by 23 per cent but the other seven have seen a rise in net profit by a combined 89 per cent. There is a similar skew in the steel industry. Three companies reported massive losses, but if they are removed from the sample, net profit grew 40 per cent for the other 14 even as revenues for all 17 companies have increased by 23 per cent. Offtake in cement and steel is heavily driven by construction, which, in turn, is driven by infrastructure project activity. Construction majors and infrastructure developers have not yet reported results but there are enough reasons to be optimistic there as well.

However, two erstwhile performers, which have traditionally driven exports, pharmaceuticals and software, continue to deliver results under par. The information technology industry (28 companies) reported 5.5 per cent revenue growth and 7.8 per cent profit growth. The pharmaceuticals industry (18 companies) saw 9 per cent revenue growth, while net profit shrank by 10 per cent. The telecom sector remains under pressure, with Bharti Airtel reporting a 5.6 per cent reduction in net profit and Idea Cellular’s losses jumping from Rs 3.8 billion to Rs 12.8 billion.

Overall, corporate results certainly show an encouraging trend, though many sectors, particularly those dominated by public sector undertakings such as banking and oil refining, are under-represented in this sample. If those results are in line with expectations, these would indicate the corporate sector is indeed pulling out of a trough. And that would gel with projections that economic growth will improve through 2018-19. The Economic Survey 2017-18, released on Monday, said that sustaining current stock valuations in India required “future earnings performance to rise to meet still high expectations”. The third quarter results so far may be a relief on that count as well.