Early bird results falter in 2nd quarter

Profit growth tepid for 108 firms that have declared results so far; revenue growth has seen a severe slowdown for Indian companies in second quarter

The second-quarter results of companies that have declared results so far seem to confirm the current fragility on Dalal Street. Reason: An unsatisfactory show by information technology services companies and Reliance Industries.

The early birds indicate a sharp slowdown in revenue growth and tepid profit growth despite gains from lower raw material costs, employee and depreciation allowances.

The combined revenues of 108 companies were up 3.2 per cent year-on-year in the second quarter, growing at the slowest pace in at least two years. The net profit growth (adjusted for exceptional items) slowed to 16.9 per cent y-o-y in the second quarter, growing at the slowest pace in the last four quarters (see chart on Page 6).

The analysis is based on the September 2014 results of companies across sectors whose comparative numbers were available for the last 12 quarters.

Analysts attribute this to an erosion of the year-on-year gains from rupee depreciation available in the previous four quarters due to a sharp depreciation in rupee in May-June 2013. "Currency depreciation had boosted rupee revenues for exporters and manufacturers who compete with imports in the domestic market. This is now wearing off, as the rupee has been range-bound for nearly a year and results now reflect volume growth that has been tepid," says Dhananjay Sinha, head, institutional equity at Emkay Global Financial Services.

Besides a general slowdown, he says top line growth was also impacted by the end of the pre-election fiscal stimulus, as the central government is striving to bring down the fiscal deficit despite stagnant tax revenues.

A poor show on the top line front has surprised many analysts who were expecting an uptick in demand. "This is a negative surprise and I am keeping my fingers crossed as most of the large manufacturing companies are still to declare their second-quarter results," says G Chokkalingam, founder and CEO Equinomics Research & Advisory. He, however, sees red at the decline in central excise duty collection in the month of September after growth in the July-August period and the dip in the index of industrial production.

The bottom line was boosted by a 7.3 per cent y-o-y fall in raw material costs as companies gained from a fall in international commodity prices -everything from energy, ore, metals to agricultural commodities. Profits also got a boost from a sharp rise in other income which was up 46 per cent y-o-y in the second quarter, growing at the fastest pace in the last two years.

That resulted in a 50-basis point improvement in operating profit margins on a sequential basis. These improved to 23.2 per cent of revenues in the second quarter against 22.7 per cent in the first quarter and 21.1 per cent during the corresponding quarter a year ago.

IT exporters such as TCS, Infosys, HCL Tech and Mindtree, which have declared their results, reported a dip in margins on a sequential basis as the effect of rupee depreciation wore off, though it was up on a y-o-y basis. Their combined operating margin declined to 31.7 per cent of revenues in the second quarter against 33.1 per cent in the first quarter and 29.9 per cent during the second quarter of last fiscal.

IT exporters have been among the biggest growth drivers of corporate earnings, accounting for 43.7 per cent of the combined net profit of the sample in the second quarter, up from around a third three years ago.

The results also indicate a slowdown in capex and expansion by companies as their existing capacity remains underutilised. Depreciation allowance was down 0.7 per cent y-o-y for the entire sample against growth in the previous two quarters. The trend was even sharper for manufacturing companies (excluding IT, financials and Reliance Industries) with their combined depreciation allowance contracting 11.4 per cent y-o-y in the second quarter, the first such dip in at least two years.

On the brighter side, companies such as Hero MotoCorp, UltraTech Cement, Infosys, Sintex Industries and GSFC, among others, reported high double-digit growth in revenues and profits, compensating for a poor show by biggies such as TCS, Reliance Industries, Bajaj Auto and Crompton Greaves.

All eyes are now on mainline companies in sectors such as automobiles, consumer goods, pharma, metals, power, construction & infrastructure, capital goods and public sector banks that are still to declare their results.