Handsome growth

Financial & energy firms shine in Q4, but slowdown hits others

The net profit growth of 2,273 companies in the January-March 2019 quarter was an impressive 39.2 per cent year-on-year (YoY), the best in 13 quarters. This is not in sync with macro-slowdown, reflected in the anaemic gross domestic product (GDP) growth of 5.8 per cent in the same quarter. Even for the Nifty 50 index constituents, it was a good quarter. Net profit growth for these 50 index companies was around 20 per cent, the highest in at least three years, though revenue growth was at a 10-quarter low. In Q4 FY19, a better show by some of the banks and energy companies aided the overall growth.

However, a closer look at the data reveals that it was largely due to a low base in the March 2018 quarter when banks, especially private corporate and public sector banks, had clocked big losses. If financial and energy companies were to be excluded, the story changes altogether. The bottom line of 1,869 non-financial and non-energy firms declined 0.1 per cent YoY in the fourth quarter of 2018-19, the lowest in six quarters, as the slowdown in consumer demand impacted manufacturing growth, while lower government investment hurt both the economy and industry. Coupled with an uptick in interest and depreciation cost, it was a double whammy. 

Another indicator of the demand pressure became evident from the sample of domestic market-focused companies, which saw core operating profit margin — excluding extraordinary profit or loss — drop below the double-digit mark, the first in at least 17 quarters, indicating pressure on the cost front as well. This sample, which largely comprises manufacturing players, excludes metals, information technology and pharmaceuticals as well as financials and energy. The Q4 numbers suggest a slowdown in private consumption demand, which has been the key driver of economic growth and corporate earnings in the last two years. The discretionary demand — automobiles and consumer durables — has, however, taken a bigger knock than non-discretionary consumption such as food and personal care products. The combined net sales of automobile makers excluding Tata Motors, which is largely a global play, was up just 2 per cent YoY during Q4, growing at the slowest pace in at least three years. 

Coming to sectors, automakers’ core operating margins were down 280 basis points on average compared with Q4 FY18, while their combined earnings before interest, tax, depreciation and amortisation (EBITDA) was down for the second consecutive quarter. The industry’s combined net profit was down 7.4 per cent YoY during the fourth quarter, the worst in at least three years. 

Fast moving consumer goods companies did relatively better with a 10.2 per cent YoY growth in net sales but their top line growth was lowest in the last four quarters, and given the cutback in retail spending, this sector would not be able to contribute to India Inc’s profits as much as it has in the past. The investment or capex-related sectors such as capital goods, construction and infrastructure reported relatively better growth numbers compared with other companies. The rest of the manufacturer-companies took a knock on their margins and profits, while the telecom sector continued to post massive losses. The stock market has shrugged off weak quarterly numbers for now because of expectations of a rate cut and a stimulus for the economy. Till then, most analysts see a downside risk to the forward earnings estimates for FY20.