Corporate earnings may disappoint again: 564 firms' combined net down 10%

Corporate India looks set to disappoint investors for the second quarter in a row, defying D-Street prediction of strong earnings growth during the fourth quarter (Q4) of 2018-19 (FY19). The combined net profit of 564 companies (excluding financials and energy), which have declared their results for the January-March 2019 quarter, is down 10.3 per cent year-on-year (YoY), their worst showing in at least  12 quarters.

The combined net sales of this universe was up 9 per cent YoY in Q4FY19, growing at the slowest pace in six quarters, hinting at a demand slowdown in the economy.

The entire sample of 670 companies performed better, reporting a 26.4-per cent net profit growth, thanks to an earnings recovery reported by public sector banks after a bad Q4 in 2017-18. In the March 2018 quarter, net profit for the entire universe had declined 24.5 per cent. However, despite this recovery, the net profit in absolute terms is 5 per cent lower than what companies had reported in the January-March 2017 quarter.  

The banking sector, as a whole, remains under water, with combined losses of Rs 9,853 crore during the  quarter, against a combined net loss of Rs 31,576 crore a year ago and a  profit of Rs 6,600 crore during the October-December 2018 quarter.

On a positive note, banks reported an uptick in their net interest income for the second consecutive quarter, taking advantage of the turmoil in the non-banking lending space.

The combined revenue of the entire sample was up 10.3 per cent during the quarter, growing at the slowest pace in the last six quarters. It includes fee income and investment income earned by lenders, besides their core net interest income.

Analysts attribute the slowdown in growth to the adverse impact of demand slowdown in sectors such as automotive, consumer durables, non-banking finance, and consumer staples, which were leading the top line growth in the last few quarters.

The results season is, however, far from over and the earnings trend could change further. The current sample only represents around 60 per cent of the listed universe in rupee terms, based on the historical run rate of quarterly revenues and profits. Many of the industry leaders such as InterGlobe Aviation, Bharat Heavy Electricals, Oil and Natural Gas Corporation, and Sun Pharmaceutical Industries are yet to declare their results for Q4FY19.

The mainline domestic market-focused companies (excluding financials, energy, technology, pharma, and metals) remained under pressure, with 8.9 per cent YoY decline in net profit (adjusted for exceptional gains and losses) during the quarter, against earnings growth of 17.7 per cent a year ago. These companies’ combined net sales were up 7.8 per cent, growing at the slowest pace in the last four quarters.

Among domestic businesses, fast-moving consumer goods (FMCG) companies outperformed, with 21.9 per cent growth in combined net profit in Q4, despite a slowdown in volume and revenue growth. Their combined net sales were up 9.5 per cent YoY, a sharp cut from 13.7 per cent growth during the third quarter. Their margins declined, as employee costs and marketing expenses grew faster than the top line. This, coupled with the recent rise in crude oil prices and demand slowdown, raises a question mark over the earnings sustainability in the FMCG industry.

Technology companies such Tata Consultancy Services, Infosys, HCL Technologies, and Wipro reported a recovery in earnings growth, driven by rupee depreciation. The industry’s combined net profit was up 17.1 per cent YoY, growing at the fastest pace in at least 12 quarters. Net sales growth at 15.4 per cent was, however, the lowest in three quarters, a result of the adverse impact of a slowdown in the global economy. Margins were also under pressure, as employee costs account for nearly 53 per cent of industry revenue, up steadily from 50 per cent three years ago.

Technology and FMCG players together account for 56 per cent of the combined net profit of ex-financials and energy companies. In the total universe, these four sectors take up 80 per cent of the combined net profit, but only 47 per cent of combined revenues.