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Early birds bring little cheer: Key firms post sub-par pre-tax Q3 profit

Pre-tax profit growth second-lowest in seven quarters; net sales growth hits three-year low of 3.3%

tax earnings
Krishna Kant Mumbai
4 min read Last Updated : Jan 24 2020 | 10:58 AM IST
The earnings season of October-December 2019 quarter of financial year 2019-20 (Q3FY20) has got off to a dull start for corporate India, as pre-tax profit growth for early birds was second lowest in seven quarters, while net sales growth hit a three-year low.

The combined profit before tax (PBT) of 143 early companies that declared their Q3FY20 results was up 12.3 per cent year-on-year (YoY) led by decline in raw material and energy costs. Companies’ raw material cost was down 1.6 per cent YoY during the quarter, while energy and fuel bill declined by 13.4 per cent YoY. In comparison, PBT was up 13.5 per cent YoY in the corresponding period last year, and it was up 13.7 per cent YoY during Q2FY20.

The demand environment, however, remains challenging with just 3.3 per cent YoY growth in combined net sales, including banks interest income during the quarter, their worst showing in at least three years (see chart).

 

 
The net profit was, however, up 24.5 per cent YoY boosted by the cut in corporate income tax, resulting in 15.1 per cent YoY decline in companies’ tax outgo during the quarter.

“The net profit growth has largely been on expected lines so far, thanks to gains from cut in corporate income tax earlier this year. However, PBT has been below par for many companies,” says Shailendra Kumar, chief investment officer, Narnolia Financial Advisors. 

As of now, he expects about 70-80 basis point cut, at best, in FY20 Nifty50 earnings per share growth after the Q3FY20 earnings season. One basis point is one-hundredth of a per cent. 

“The numbers suggest that only one in four companies reported organic growth in revenues and profits without gains from either lower raw material prices or the tax cut,” says G Chokkalingam, founder & managing director, Equinomics Research & Advisory Services.

The stress is even visible in index firms as many reported sub-par earnings, despite gains from lower raw material and energy prices. For example, only four out of 12 Nifty 50 firms in the early bird sample reported double-digit growth in net sales or interest income — HDFC Bank, HCL Tech, Axis Bank and IndusInd Bank. Of these, only three reported double-digit growth in PBT.

At the other end of the spectrum, five index firms witnessed YoY decline in PBT, including TCS, Larsen & Toubro, Wipro, Axis Bank and Zee Entertainment.

The combined pre-tax profit of index firms in our sample was up just 4.5 per cent YoY, while their net sales were up just 3.6 per cent YoY. Their combined net profit was, however, up 13.6 per cent YoY, driven by 15 per cent YoY decline in their tax outgo.

As expected, retail lenders accounted for the bulk of the incremental growth in profits and revenues. In comparison, IT services firms such as TCS, Infosys and Wipro disappointed with low single-digit growth in revenues and profits. Reliance Industries didn’t help either with 3.6 per cent YoY growth in PBT, while its net sales were down 2.5 per cent YoY. It is the worst show by the company in at least three years.

Bank & financials, IT services and Reliance Industries account for 86 per cent of the combined net profit of all early bird companies in the Business Standard sample. The combined PBT of 118 firms, excluding bank and financials, is up 4.5 per cent YoY in Q3, down from 16.6 per cent growth YoY a year ago. Combined net sales were up just 1.2 per cent YoY in Q3FY20, growing at its slowest pace in at least three years. In comparison, topline was up 34 per cent YoY during the corresponding quarter a year ago and 4.4 per cent y-o-y during Q2FY20.  

Analysts are, however, cautious about the future earnings trajectory of retail lenders. “Contrary to earlier expectations, bad loans are yet to peak and most retail lenders reported a rise in their non-performing assets in Q3 and a slowdown in new loans,” says Chokkalingam.

Topics :pre-tax profit

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