Earnings under pressure

High interest outgo and weak demand are worrying

The downward  trend in revenue growth and contraction in net profit for corporate India in the first quarter of 2019-20 is not entirely surprising. Although weak demand was expected during the general election as buyers postpone certain purchases, the slump seems to have been more pronounced. Combined net sales for 736 companies that have declared results so far have grown by just 8 per cent, year-on-year (YoY), which is the lowest in about three years. If financials and energy sectors are excluded, revenue growth at 5.8 per cent, is the slowest in last nine quarters. From a longer-term perspective, the bigger worry is that the slowdown in revenue growth, which analysts believe hints at weak aggregate demand in the economy, can worsen in the coming quarters.

The combined net profit for companies excluding financials and energy has declined 2.9 per cent in Q1 — the fourth consecutive quarter of earnings contraction. It is also a quarter of one-offs — earnings have got a boost from a sudden spurt in airlines' profitability due to the grounding of Jet Airways. But if Interglobe Aviation which runs Indigo Airlines is excluded, net profit for the sample is down 5.7 per cent. After including financials and energy, the headline net profit growth is up 21.9 per cent, as banks such as State Bank of India, ICICI Bank, Allahabad Bank and Bank of Maharashtra, among others, have reported substantial profits compared with losses in the same quarter last year. However, banks are also showing signs of slowdown with growth in net interest income hitting a five-quarter low during April-June 2019 quarter.

Among individual sectors, auto and auto ancillaries are the worst performers so far because of the sales decline seen across segments. The sector's combined net profit is down 66.5 per cent for the quarter, while net sales have declined by 6.8 per cent. In comparison, fast-moving consumer goods (FMCG) companies have performed relatively better despite a visible slowdown in volume and revenue growth. The sector's combined net profit is up 13.5 per cent, compared with a 19.9 per cent growth registered a year ago. Growth in net sales is 9.8 per cent, the lowest in five quarters, along with weak commentary from managements. Information technology companies, one the biggest contributors to corporate earnings, have also reported lower growth in both top line and net profit. Industry margins remain under pressure as operating costs, especially salary and wages have grown faster than revenues. Metals and mining companies have shown the impact of the US-China trade that has battered metal and ore prices globally.

Earnings have been boosted by benign raw material and energy prices pushing up margins by 80 basis points, with gains most visible in the FMCG sector. However, a growing divergence between operating profit growth and interest liability can spell trouble for companies with debt on their books. Interest costs are up 28.2 per cent for the quarter, outpacing operating profit and revenue by a wide margin. An interest rate cut on Wednesday can help reduce the burden, but things will actually improve when consumer confidence returns.