Margins under pressure

Q3 corporate results indicate expenses outpacing revenue

The 0.9 per cent year-on-year (YoY) growth in the adjusted net profit of 385 companies, which have released their results for the third quarter (Q3) of the current financial year so far, does not inspire much confidence. If financials and energy companies are removed from the sample, net profit has grown 6.4 per cent in Q3 — the worst performance in five quarters. For the entire universe, growth in other income, which has often aided net profit growth in the past, is lower than revenue growth. Companies, however, have reported strong double digit growth in top line, thanks to higher commodity prices resulting in higher product prices. Total income, which is the sale of goods and services after removing indirect taxes for companies and net interest income for banks, went up an impressive 24.2 per cent YoY in Q3, but total expenses grew higher at 28.6 per cent. As a result, core operating profit margin has steadily declined this year from 15.5 per cent in Q1 to 14.8 per cent in Q2 and 13.3 per cent in Q3. Besides higher input prices, other expenses and overheads too have grown faster than profit growth. For the corporate sector, excluding energy and financials, core operating margin is down nearly 120 basis points compared to Q3 FY18. 

On the bright side, two of the largest sectors in terms of profit — information technology services and fast moving consumer goods (FMCG) — have reported encouraging top line numbers during Q3. TCS and Infosys’ revenue growth is at nearly three-year high, thanks to gains from rupee depreciation and higher corporate spending in the US, which is their key market. Companies reported a slight expansion in their margins despite an uptick in employee cost and fresh recruitments. For FMCG companies, too, revenue growth is at a three-year high indicating good demand conditions both in urban and rural markets. Consumer players, however, have taken a small hit on margins as expenses have grown faster than revenues. In the results declared from the financial sector so far, private sector banks, including corporate lenders such as Axis Bank, have reported strong numbers as expected, but losses of public sector banks have expanded as provisions for bad loans have increased. In the non-banking space, there is a decline in earnings and net interest margins, as loan growth has slowed and interest costs have shot up because of tighter liquidity in the wholesale lending market. Larsen & Toubro has reported excellent numbers, whereas other companies from engineering and infrastructure haven’t done well, and neither has cement.

On a historical average basis, this sample of 385 companies out of which 20 are Nifty 50 companies, represents around half the listed companies in terms of profits and around a third in terms of revenues in rupee terms. Many large private manufacturing companies are yet to report their Q3 earnings as are state-owned firms including oil refineries and banks such as State Bank of India. All of these could change the numbers by the end of the earnings quarter. The robust consumption story — the only theme that has worked in the past few years — is also looking a little fragile as small ticket FMCGs are doing well, but consumers are not as forthcoming in big ticket items such as automobiles. A clearer picture will emerge next month.