Companies in cyclical sectors see large positive swing in Q2 earnings

Analysts say that while the bottom line was hit by cost pressures, demand growth was impacted by a rise in interest rates and much more

The recent changes in India’s macroeconomic environment have begun to weigh on corporate growth and earnings. While earnings of Nifty 50 index companies have grown 14.7 per cent, it is a bounty from higher commodity prices and improved performance of financials. Excluding financials, energy and metal and mining sectors, combined earnings of the remaining 28 companies declined by 3.1 per cent year-on-year (YoY) during the July-September 2018 quarter, the worst in the last five quarters. In rupee terms, the combined quarterly net profit for these 28 companies is flat at around Rs 400 billion over the last two years. 

Earnings were hit by a combination of high input costs and moderation in demand. Operating profits (including other income) were down 1.8 per cent YoY in the second quarter – their worst show in at least three years. The core operating margin (excluding other income) for these 28 companies was down 400 basis points YoY in the second quarter as expenses grew faster than corporate revenues. 

Analysts say that while the bottom line was hit by cost pressures, demand growth was impacted by a rise in interest rates, higher tax burden and fading of the fiscal multiplier. The headwinds don’t show in overall numbers as companies in cyclical sectors such as energy, metals, and banking saw a large positive swing in earnings. For example, the State Bank of India, ONGC and Coal India together accounted for nearly 80 per cent of the Nifty companies’ total incremental earnings growth in Q2. 

This, however, is not a recipe for a sustained expansion in corporate earnings.