Q3 results review: Corporate earnings see biggest dip in three quarters

Decline in crude oil prices is expected to aid margins, say experts

Corporate performance took a big knock during the October-December 2018 quarter (Q3), with the combined net profit of 2,338 companies that have declared results so far reporting a 28.3 per cent year-on-year (y-o-y) decline, the biggest in three quarters. Adjusted for exceptional gains and losses, earnings were up 2.2 per cent compared with 7.8 per cent growth a year ago and 16.6 per cent during the second quarter of the current fiscal year.

Their combined revenues were up 17 per cent y-o-y during Q3 at around Rs 21.76 trillion, lower than 19.6 per cent growth reported during the second quarter. 

“We are staring at a slowdown in corporate earnings, but we have to see whether it's cyclical or a blip for a few quarters. In contrast to corporate numbers, macro variables such as inflation and the GDP trend show a rebound in growth,” said G Chokkalingam, founder and MD, Equinomics Research & Advisory Services. 

The picture gets worse if financial and energy companies are excluded. The combined net profit of these 2,005 companies was down 39.7 per cent y-o-y to Rs 47,585 crore, the lowest pace of growth in at least 12 quarters. Adjusted for exceptional gains and losses such as impairment of assets, the combined net profit of these companies was up a mere 3 per cent. Their combined revenue was up 12.2 per cent to around Rs 12 trillion, as against top line growth of 15.4 per cent during the preceding quarter (Q2FY19). 

Earnings in the quarter have been adversely affected by large losses by key manufacturing and infrastructure companies such as Tata Motors (Rs 26,993 crore), Vodafone Idea (Rs 5,005), Punj Lloyd (Rs 2,795 crore), Adani Power (Rs 1,181 crore), and Rolta India (Rs 1,063 crore). 

In all, 701 companies across sectors (including financials & energy) reported net loss during the third quarter against 630 companies a year ago and 699 companies during the July-September 2018 quarter. Put together, the combined losses of these companies zoomed to Rs 65,922 crore during the third quarter from Rs 32,027 crore a year ago and Rs 43,060 crore during the second quarter of FY19. 

As expected, companies took a hit on their profit margins during Q3 as expenses grew faster than revenues. The core operating profit margin for companies, excluding financials & energy, was down 90 basis points compared to the July-September 2018 quarter and nearly 300 basis points on a y-o-y basis to 12.9 per cent of net sales during Q3FY19.

Domestic market-focused companies, however, reported a 160-basis point expansion in operating profit margins on a sequential basis, while it was down 80 bps on y-o-y basis. One basis point is one-hundredth of a per cent.

Analysts attribute this to the recent moderation in energy (mainly crude oil) and commodity prices, lowering the input costs for companies in sectors such as FMCG, consumer durables, and automobiles.

"Crude oil is down nearly 28 per cent from its peak price in 2018. This should aid corporate margins in FY20 if the demand environment remains benign," said Chokkalingam.

Many lenders, especially public sector banks, also reported losses at net level during Q3. These include Bank of India, IDBI Bank, Bank of Maharashtra, United Bank (I), and UCO Bank, among others. Private lender IDFC First Bank too posted a net loss.

Domestic market-focussed companies also reported a slowdown in earnings led by sectors such as automobiles, telecom, and infrastructure companies. 

In comparison, consumer goods companies such as Hindustan Unilever, Dabur, Britannia, and Nestle reported faster growth in revenue and earnings driven by higher public spending by the government besides a favourable base effect.

Among other key sectors, software exporters such as Tata Consultancy Services, Infosys, and Wipro reported faster growth in topline driven by gains from rupee depreciation in the last one year.