Demonetisation ruffles feathers of early birds

Combined net profit of 144 firms inched up 2.4% in Q3, slowest in 7 quarters

Corporate India looks set to disappoint Dalal Street for the third consecutive quarter, with lower-than-expected earnings growth.

The combined net profit (adjusted for exceptional gains and losses) of 144 companies that have declared their third quarter results grew by 2.4 per cent year-on-year (YoY), growing at the slowest pace in the past seven quarters.

Heavyweights haven’t done well either, with the combined net profit of seven Nifty 50 companies that have declared their results rising 2.3 per cent YoY. In comparison, brokerages expected Nifty 50 companies to report 10.8 per cent YoY increase in net profits during the October-December 2016 quarter.

The trends in topline growth, however, have been encouraging, with combined net sales of the sample up 7.8 per cent YoY in the third quarter, growing the fastest in 10 quarters. This is largely due to Reliance Industries (RIL), which gained from a global recovery in energy prices. The company accounts for a third of the combined net sales of the sample.

The early-bird results, however, largely reflect the earnings trend of private-sector banks, RIL and information technology (IT) heavyweights such as Tata Consultancy Services (TCS) and Infosys. These three groups together account for 85 per cent per cent of the sample’s combined net sales of Rs 1.88 lakh crore in the third quarter. Their share of the sample’s adjusted net profit is even higher at 95 per cent.

Early-bird results also show the adverse effect of demonetisation, especially on the manufacturing and services sectors that serve the domestic market. The combined adjusted net profit of 88 companies -excluding financials, IT, and oil and gas - declined by 14.8 per cent in the third quarter, against 64.4 per cent growth during the second quarter and 141.6 per cent YoY growth during the same period last financial year. This is the worst show by the sample companies in the past seven quarters.

Analysts say that any further deterioration in the earnings of domestic market-driven companies could result in more bad loans for the banking sector, leading to a cascading effect on the rest of the economy. “Any incremental rise in banks’ non-performing assets would force banks to clamp down on credit growth, putting pressure on the demand growth across the economy,” says Dhananjay Sinha, head-institutional equity, Emkay Global Financial Services. He expects banks with corporate exposure such as government-owned banks and few private-sector banks to take a hit from the demand slowdown induced by the currency purge.    

Domestic market-focused companies in the sample spent Rs 47.1 on raw materials and energy for every Rs 100 of their net sales during the third quarter, up from Rs 45.9 during the second quarter of the current financial year. Their core operating profit margin was down 50 basis points on a sequential basis to 17 per cent of net sales in the third quarter, against 17.5 per cent in the second quarter. One basis point is one-hundredth of a per cent.

However, it should be mentioned that top companies in sectors worst-affected by demonetisation such as automobiles, consumer goods and building materials are yet to declare their results for the third quarter. Nor does the sample include metal producers and crude oil producers, which are likely to post strong double-digit earnings growth, thanks to a rebound in global commodity prices in the past three months.

Among individual companies, private-sector banks such as YES Bank and IndusInd Bank reported strong double-digit growth in earnings, while Axis Bank disappointed with a sharp decline in profit and surge in bad loans. Among software exporters, TCS beat Street estimates on profits, thanks to gains from the depreciation in the rupee during the quarter, while Infosys failed to cash in from a weaker rupee.

In all, over a third of the companies in the sample (48 out of the 135 comparable companies) reported YoY decline in revenue, while 45 companies reported YoY decline in net profit or an increase in net losses during the quarter. This is in line with Street estimates of 18 Nifty 50 companies likely to report YoY decline in net sales during the quarter.

Other analysts are keeping their fingers crossed, given most of the major companies are yet to declare their results. “Most large companies are yet to declare their results and it would be too early to pass a judgment,” says G Chokkalingam, founder & chief executive officer, Equinomics Research & Advisory Services.

PROFIT LAGS SALES GROWTH



BUMPY RIDE FOR DOMESTIC PLAYS
Earnings growth for companies, excluding financials, IT, oil & gas*