 "RIL Q1 consolidated net at Rs 7,464 cr")
The July-September 2016-17 quarter earnings season has started on a positive note for Corporate India. The combined net profit (adjusted for exceptional gains and losses) of 131 companies that have declared their results for the second quarter was up 9.5 per cent year-on-year (y-o-y), an improvement from 6.9 per cent y-o-y growth in the previous quarter and 6.8 per cent y-o-y reported a year ago.
The combined net sales for the sample was up 7.9 per cent y-o-y, a sharp turnaround from the 0.5 per cent y-o-y decline in the previous quarter and 15.1 per cent y-o- y decline during the same quarter last year.
However, if the numbers of banking and financial services, and Reliance Industries (RIL) are excluded, the combined net profit (adjusted for exceptional gains and losses) was up five per cent y-o-y, marginally up from 4.2 per cent growth in the previous quarter and down from 7.7 per cent y-o-y growth last year. These numbers suggest a slowdown in demand growth, compared to the previous two quarters.
The combined net sales for the sample was up 7.9 per cent y-o-y, a sharp turnaround from the 0.5 per cent y-o-y decline in the previous quarter and 15.1 per cent y-o- y decline during the same quarter last year.
However, if the numbers of banking and financial services, and Reliance Industries (RIL) are excluded, the combined net profit (adjusted for exceptional gains and losses) was up five per cent y-o-y, marginally up from 4.2 per cent growth in the previous quarter and down from 7.7 per cent y-o-y growth last year. These numbers suggest a slowdown in demand growth, compared to the previous two quarters.
The combined net sale for the sample (excluding RIL and financials) was up 6.8 per cent y-o-y, growing at the slowest pace in the past eight quarters. This is largely due to a slowdown in the information technology (IT) sector and lower-than-expected revenue growth reported by UltraTech Cement and ACC. Hindustan Zinc also contributed negatively, with 11.3 per cent y-o-y decline in its net sales during the quarter. In comparison, brokerages had expected the combined net profit of Nifty 50 index companies to grow by 3.1 per cent y-o-y during the second quarter, while their net sales were expected to grow by 3.3 per cent on y-o-y basis during the second quarter. The current early bird sample has nine Nifty 50 companies.
Analysts aren’t pleased with the early bird results. “There have been more disappointments than positive surprises during the quarter so far. While IT companies were expected to report lower numbers, the results for building material and consumer companies suggest the demand revival has been weaker than expected. We now foresee earnings downgrades post the second quarter earnings season,” said Dhananjay Sinha, head-institutional equity, Emkay Global Financial Services.
The results show that Corporate India continues to retain most of the gains from lower raw material and energy prices. The core operating profit for the sample (excluding RIL and financials) was up 80 basis points (bps) sequentially or 20 bps y-o-y basis during the quarter. Every Rs 100 worth of net sales had Rs 10.7 worth of raw materials during the July-September 2016-17 quarter, against Rs 11.8 in the June quarter and Rs 12.1 a year ago. The energy intensity was down to 1.9 per cent of sales during the second quarter, from two per cent in the previous quarter and 2.6 per cent a year ago.
The raw material and energy intensity figures are low due to the dominance of IT services exporters such as Tata Consultancy Services, Infosys, Wipro and HCL Technologies in the sample. Early bird results have an in-built bias, as there are more private sector financial services and IT companies reporting their numbers early, compared to other sectors. Collectively, IT companies accounted for 71 per cent of the combined net sales of the sample (excluding RIL and financials) and 78 per cent of the sample’s net profit (adjusted for exceptional gains).
The trend for IT companies is worrying, as they face unprecedented inflation in their biggest cost head – employee cost. The combined employee cost for the sample was up 11.4 per cent y-o-y during the quarter, leading to a further rise in labour intensity. Every Rs 100 worth of net sales cost Rs 39.4 worth of labour during the second quarter, up from Rs 39.3 in the previous quarter and Rs 37.8 a year ago.
Analysts, however, say that early bird results are not representative of Corporate India’s performance, and it is too early to come to a conclusion. “The numbers largely reflect the performance of IT sector and few private sector banks. Most of the manufacturing and domestic market-focused companies are yet to declare their results; these firms are expected to report better numbers,” said G Chokkalingam, founder & chief executive officer, Equinomics Research & Advisory.
