Corporate growth revival elusive in Q1

Early birds fall short of Street expectations on sales, profit growth

Revival of the country’s corporate growth, as predicted by  earnings estimates of leading brokerages earlier this month, seem elusive as ever.

The combined net sales of 162 companies that have declared their results so far was up 0.5 per cent on a year-on-year (YoY) basis during the April to June period (Q1), down from the 3.8 per cent growth reported by the same set of companies during the January-March 2016 quarter.

Total income (net sales and other income) grew 3.1 per cent in Q1, boosted by a 26 per cent YoY growth in income led by private sector banks and Reliance Industries.

Net sales of 11 Nifty 50 companies that have declared their results so far was down 0.1 per cent YoY in Q1, lower than Street expectations of 4.1 per cent YoY growth in their combined net sales of index companies. For banks and financial companies net sales is their net interest income i.e. gross interest income minus interest expenses.

On the brighter side, gains from lower commodity and energy prices are turning out to be stickier than Street expectations. Combined net profit (adjusted for exceptional items) for the sample was up 6.8 per cent YoY during the first quarter, lower than the 16.7 per cent YoY growth in the fourth quarter of last financial year  but better than the 1.7 per cent decline reported during the same quarter in the last financial year. Nifty 50 companies in the sample reported earnings growth of 11.9 per cent YoY, better than the Street estimates of a two per cent decline in the combined earnings of index companies during the first quarter.    

However, early bird numbers largely capture the earnings trends in private sector banks, IT exporters and Reliance Industries. These firms, together, accounted for nearly four-fifth of the combined revenue and adjusted net profit of the sample companies during the quarter. Most of the index heavyweights, especially manufacturing companies, are yet to declare their results.

Going by the early bird numbers, top line growth in the June 2016 quarter is unlikely to impress the market. Before the 3.8 per cent top line growth reported in March 2016 quarter, the current sample had seen five straight quarters of revenue decline.

Profit growth surprised on the upside despite the first sequential decline in the sample Ebitda (earnings before interest, depreciation and tax) margins in two years induced by an uptick in raw material cost. The Ebitda margins for the entire sample declined to 35.8 per cent of net sales during the first quarter from 36.1 per cent in the previous quarter. However, it was still higher by nearly 200 basis points on year-on-year basis.

For every Rs 100 worth of revenue for corporate India, raw materials accounted for Rs 31.60 during the June quarter, up from Rs 30.2 in the previous quarter, but still better than Rs 37.3 during the same quarter last year.

Among individual companies, earnings growth was led by UltraTech Cement, HDFC Bank and Reliance Industries. The mid-cap star performers included Ashok Leyland, Bharat Financial Inclusion (formerly SKS Finance), Motilal Oswal Financial and DB Corp among others.

Private sector banks and non-banking finance companies continue to lead the growth and earnings chart driven by a decline in interest cost and lending opportunities opened up because of the balance sheet issues in public sector banks. Some of the companies in the sample include HDFC Bank, Axis Bank, IndusInd Bank, Kotak Mahindra Bank, LIC Housing Finance, M&M Finance and Dewan Housing Finance among others.   

The combined net interest income of 36 banking and financial companies was up 17.4 per cent YoY during the quarter while their net profit (adjusted for exceptional items) was up 8.5 per cent. Both the numbers, while a tad lower, were at par with the industry growth in the preceding quarter.

The industry’s interest cost was up 9.6 per cent YoY, growing at a slower pace than revenues leading to a further expansion in the net interest margins. This compensated for a spike in other expenses (largely provisions for bad loans) that was up 38 per cent YoY during the quarter up from 24 per cent growth in the previous quarter and 9.5 per cent growth a year ago.

In comparison, technology heavyweights such as TCS, Infosys and Wipro reported a further slide in revenue growth while their core operating margin (excluding other income) declined to a three-year low excluding March 2015 quarter when TCS’ profitability was impacted by one-time special employee bonus.

The industry is facing a double whammy of slower revenue growth and the burden of an increase in employee costs every quarter since March 2015. Every Rs 100 worth of net sales now costs the industry Rs 50.5 in salary & wages up from Rs 48.9 in the previous quarter and Rs 50.1 a year ago.

Going forward, all eyes will on the quarterly earnings of old economy heavyweights such as Tata Motors, Tata Steel, Hindalco, NTPC, Coal India, Larsen & Toubro, Maruti Suzuki, Hero MotoCorp, Tata Power, GAIL, ONGC, Sun Pharma and Dr Reddy’s Lab among others. The Street will also have its eyes on the results of key public sector banks such as State Bank of India, Punjab National Bank, Bank of Baroda and Bank of India among others.

Analysts say that below par results from these heavyweights could trip the current bullish sentiment on Dalal Street. Better-than-expected numbers could, however, provide additional ammunition to the bulls.