Tepid start to Q3 earnings as India Inc reports net profit growth at 10.1%

The third quarter (Q3) earnings season has started on a sluggish note for Corporate India. While India Inc has reported robust sales growth of 37.5 per cent year-on-year (YoY), net profit growth has been disappointing at 10.1 per cent, indicating margin pressure.
 
The combined net profit of 94 companies that have declared their results for the October-December 2018 quarter stood at Rs 35,723 crore, up from Rs 32,452 crore a year ago.
 
In comparison, companies’ combined earnings were up 14.7 per cent YoY during the second quarter of the current fiscal year (2018-19, or FY19) and 21.6 per cent YoY a year ago, indicating slowdown in the pace of earnings growth.
 
Earnings growth, however, would have been higher during the quarter if not for  exceptionally high profit reported by Infosys during the December 2017 quarter due to one-time gains from tax refund.
 
The sample companies’ combined net sales was up 37.5 per cent YoY, growing at the fastest pace in at least three years. The top line growth was led by Reliance Industries (RIL), which reported 56.7 per cent growth in its top line during the quarter, accounting for nearly 70 per cent of all top line growth during the period. Excluding RIL, combined net sales of the remaining 93 companies was up 21.5 per cent, while their net profit was up 10.6 per cent.

 

The early bird sample has eight companies that are part of the Nifty50 index. The combined net profit of these index companies was up 9.2 per cent during the quarter, while their net sales were up 38.6 per cent during the quarter.
 
Early bird sample is, however, not representative of Corporate India, as top firms for key industries such as automobiles, corporate banking, metals and mining, capital goods, telecom, cement, power, and infrastructure, are yet to declare their results for Q3FY19.
 
Information technology (IT) services exporters such as Tata Consultancy Services, Infosys, Wipro, and Mindtree were the single-largest earnings contributor to the early bird sample. Together these companies accounted for 41.3 per cent of the sample companies’ net profits and 26.3 per cent of their net sales during Q3. RIL accounted for another 28.7 per cent of the sample firms’ combined net profit and 52 per cent of their combined net sales.

 
IT companies outperformed the rest of their peers during the quarter, with 12 per cent growth in net profit and 18.6 per cent growth in net sales. For software services, the December 2018 quarter was the best in three years.
 
Analysts attribute this to gains from rupee depreciation, which pushed up revenues in rupee terms, and to faster economic growth in the US, the industry’s key market. The bulk of the industry’s expenses, including salary and wages, are in rupee terms, while most of the revenues are billed in US dollar terms.
 
At 24.2 per cent of the net sales, tech companies’ core operating margin was the highest in the last four quarters as employee costs grew slower than their revenues.
 
Non-tech companies, however, reported decline in operating margin as their expenses grew faster than revenues. Core operating margin for companies’ ex-IT was down 430 basis points (bps) on a YoY basis and 100 bps on a sequential basis. One basis point is one-hundredth of a per cent. Here, RIL was the biggest laggard as its core operating margin was down 400 bps YoY and 110 bps on a sequential basis during Q3. Earnings growth for non-tech companies was also pulled down by a relatively faster growth in interest expenses.
 
The combined interest expenses for the entire sample of 94 early bird companies was up 37.4 per cent during the quarter, growing at a faster pace in at least three years.