Earnings drought

Corporate results would get a lot worse in the coming quarters

Even as the stock market has risen sharply over the last two trading sessions, corporate performance in the last quarter (January-March 2020) presents a dismal picture with a broad trend of lower revenues, lower profits, and lower margins. An analysis of the data of 295 listed companies shows that income, operating profits, and profit after tax (PAT) have declined by 1.8 per cent, 4.9 per cent, and 11.6 per cent, respectively, over the corresponding period last year. At a more granular level, if refineries and banks are removed from the sample, operating revenues for other sectors dropped 2.7 per cent, while PAT has gone down by 10.6 per cent. If non-banking financial companies are also removed from the sample, operating revenues have dropped 1.6 per cent and PAT 8.4 per cent. Operating margins have also reduced from 26.2 per cent to 25.3 per cent for all non-financial, non-oil, and non-banking businesses. Moreover, the quality of earnings may have declined as total income has been boosted by a big 15.9 per cent climb in other income, which would not be sustainable. 

While many private-sector majors have declared results, most of the public-sector enterprises (PSEs) have not. Going by the poor trends in banking and refining, these two sectors could be braced for trouble since they contain clusters of large PSEs. Banking has seen a 17 per cent decline in PAT, with 12 banks having declared results. Of these, Axis Bank and YES Bank are the worst performers, both with huge losses. In refining, Reliance Industries has seen lower refining margins and lower profits. It also had to book an extraordinary loss as the value of inventories declined sharply due to lower crude oil prices. One of the few bright spots is cement, where strong performance by Ultratech, Shree Cement, and Ambuja Cement stands out. However, the other core industries did not see similar gains. In the steel industry, JSW Steel went into the red, while Uttam Galva suffered greater losses than a year ago. Power generation also saw overall PAT for eight companies slipping into loss from profits of Rs 265 crore a year ago. 

However, in telecom, both Reliance Jio and Bharti Airtel posted encouraging results. Consumption, or the lack of it, was a worrying factor. As many as 11 fast-moving consumer goods companies have declared results and their PAT has declined 24.5 per cent while operating income is down 4 per cent. Only three automobile manufacturers have declared results but profits are down 9.9 per cent while operating income is down 14.9 per cent. Among major export-oriented industries, IT declared reasonable results with 38 companies declaring an increase of 8.2 per cent in rupee income alongside 1.4 per cent rise in PAT. However, all the IT majors had a very cautious guidance. 

Going by these results, the first quarter (April-June 2020) will obviously be a washout. Not only have two months been lost to a lockdown, consumption has been declining for the past six to seven quarters and widespread unemployment will take a further toll. It will be important to see how quickly firms can move back to normalcy. Extended restrictions will affect capacity utilisation. A delayed recovery will have implications for markets, which seem to be discounting some economic recovery.