India Inc’s earnings have disappointed again: Its annual profit growth in the three-month period ended December 2014 has been the worst in five quarters, with the aggregate net profit of 2,941 companies declining 16.9 per cent. Even after adjusting for one-offs (extraordinary transactions), it has been 6.3 per cent lower than a year ago.
That is not all. These companies’ sales growth has been the weakest in at least 12 quarters.
For the Sensex companies, the reported net profit has on a year-on-year basis declined 6.5 per cent — the weakest show in six quarters — on a 2.2 per cent decline in sales. The profits of at least 17 Sensex companies were lower than Bloomberg’s consensus estimates. On an aggregate basis, Sensex profit stood 7.5 per cent short of the estimates. (DISAPPOINTING SHOW)
“Earnings were a drag. It has been a polarised market,” says Devang Mehta, head of equity advisory at Anand Rathi Financial Services.
Pankaj Pandey, head of retail research at ICICI Securities, says the numbers mostly are a shade below expectations, and very few companies have been able to surprise positively.
There could have been many reasons for the weak performance, such as currency movements and subdued demand.
Dhananjay Sinha, co-head of institutional research (economist & strategist), Emkay Global, says, aggregate demand has been weak, as weakness in the global markets like Europe and China has affected export-oriented companies. Another variable, according to him, has been currency. The rupee depreciated from its May 2013 level and, so, there was year-on-year effect till the June 2014 quarter. “The base effect has started to kick in. The September and December quarters of 2014-15 have seen this base effect of the rupee’s depreciation fading out,” Sinha says.
A demand weakness is visible in firms’ volume growth. For the December quarter, many fast-moving consumer durables ones, as well as two-wheeler players, saw slow sales volume growth. Also, for many sectors, pricing power was weak. Though the cement sector saw healthy growth of seven-eight per cent, realisations were weak.
Pandey says FMCG companies have witnessed a dismal volume growth of three to seven per cent due to a delay in urban discretionary demand recovery. Also, the effect of a high base has come into play, as festive-season demand had advanced this year to the September quarter, against the December quarter last year.
Operating profit margins of 1,992 manufacturing companies in the sample were down 100 basis points on a year-on-year basis and 140 basis points sequentially, largely due to a decline in sales and a rise in employee and power & fuel expenses.
The government, too, has also tightened its purse strings, to meet its fiscal targets. This has impacted topline growth of companies. Likewise, a sharp decline in commodity prices (steel, oil, coal) has put pressure on top line and bottom line of producers.
Not surprisingly, companies across sectors like metals, capital goods, infrastructure, automobile and even consumer goods have disappointed. Experts also put part of the blame on markets, which had built high hopes from a fall in input prices.
It is not that companies have not benefitted from lower input prices but the gains have been lower than expected. For the 1,992 manufacturing companies, the aggregate cost of goods sold has fallen eight per cent annually and 3.7 per cent sequentially - much more than the sales decline of 3.3 per cent and 2.5 per cent, respectively.
But the full benefits of the price decline have not come in the December quarter. These, experts believe, could be more visible from the March quarter onwards. But, even as sales and PBIDT (profit before interest, depreciation and tax) of the manufacturing companies has declined, interest costs and depreciation have increased by seven-eight per cent each.
Mehta says: “To an extent, people got more optimistic about the fall in crude oil prices and its positive impact on corporate profitability. The decline in cost of inputs is not that visible. Inventory losses, especially in the case of oil companies, are another reason for the weak results.”
The decline in crude oil prices led to inventory losses of nearly Rs 14,000 crore for public-sector oil marketing companies. This, in turn, suppressed their profitability. While Bharat Petroleum has swung into profit at the net level, due to subsidy compensation from the government, it has reported an inventory loss of Rs 1,600 crore. Indian Oil has reported an inventory loss of over Rs 12,000 crore, leading to a 175 per cent rise in net loss for the quarter, to Rs 2,637 crore.
In banking, too, many public-sector banks have seen pressure on their profits in the December quarter, due to an increase in provisions, as asset quality has worsened and proved a drag on the sector. However, the sector has still managed to post a decent 11.8 per cent increase in aggregate profit because of a much better performance by private banks. The banking sector, accounting for a fifth of the aggregate profits, has supported India Inc’s overall profits.
Capital goods and engineering companies have disappointed the Street. While aggregate sales and profit of metal companies - steel and non-ferrous - which account for 16 per cent of aggregate reported net profit, have fallen one per cent and 53 per cent, respectively, the automobile sector’s aggregate profit has declined 10 per cent, mainly due to a 25 per cent fall in Tata Motors’ profit. Excluding Tata Motors, the sector’s aggregate profit has stood 14 per cent higher than the year-ago period.
Though the pharma sector aggregates paint a grim picture, that is largely due to two companies - Ranbaxy, whose losses have jumped six times to Rs 1,030 crore; and Strides Arcolab, whose profit has fallen from Rs 3,525 crore in the year-ago quarter to Rs 97 crore. Adjusted for these, the sector’s profits have been down three per cent.
On the positive side, Sensex companies that have beaten estimates include Maruti, NTPC, Bajaj Auto, Bharti Airtel, M&M, Tata Power, Infosys and Sesa Sterlite. Hindustan Unilever has exceeded the estimates too, but that has largely been due to exceptional income.
Among sectors, information technology has done relatively good, with its top line growing 10 per cent and profit four per cent. This was partly affected by cross-currency headwinds, while demand environment remains stable. Private banks did well, too.
The outlook for full 2014-15 is far from rosy. “For the first nine months, Sensex companies have reported PAT (profit after tax) growth of 7.4 per cent, Nifty ones of 5.2 per cent and BSE500 firms of 10 per cent. The average of quarterly earnings growth for Sensex companies since the June quarter of 2008-09 has been eight-10 per cent. So, earnings growth for 2014-15 will be lower than estimated,” says Sinha.
Given the trend, experts believe expectations will have to be toned down for this financial year and the next.
Nevertheless, 2015-16 earnings growth is expected to be in mid-teens. Pandey says the benefit of a decline in commodity prices will be visible from the March quarter which should provide a leg up to earnings going forward.
But till growth momentum picks up, sectors that are doing well in terms of earnings and volume growth will continue to command premium, and the polarisation in markets and premium for good earnings should continue.