India Inc's March earnings a washout

100-odd firms see first net profit decline in eight quarters, sales down 15.6% YoY

If morning shows the day, India Inc’s overall earnings for the March quarter are turning out to be a washout, despite a few large companies like Reliance Industries Ltd reporting better profits. 

About 100 firms that have declared their March-quarter results so far, across sectors, have reported a combined 9.2 per cent year-on-year net profit decline to Rs 28,284 crore (Rs 282.84 billion), and a 15.6 per cent drop in net sales to Rs 1.99 lakh crore (Rs 1.99 trillion).

This is the first time in eight quarters of a year-on-year fall in net profit.

The brighter side, though, is an improvement in operating margins, with companies gaining from a fall in energy and raw material prices.

Raw material cost for the entire sample of companies was down 47.4 per cent on an annual basis, while power and fuel costs rose only 3.3 per cent.

“Thanks to lower commodity prices, the decline in profits was lower than the corresponding fall in revenues.

“The trend might get more pronounced when automobile makers report their numbers later this month,” says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.

Core operating margins (excluding other income) jumped nearly 300 basis points to 26.1 per cent of net sales in the quarter, compared with 23 per cent a year ago.

Its sustenance, however, will need strong demand growth, which looks doubtful in the near term.

RIL’s revenue fell a whopping 41 per cent due to the sharp decline in crude oil prices.

But its profits rose -- both annually and sequentially -- on the back of better gross refining margins, higher petrochemical margins and lower working capital costs.

“The early results have not been up to the mark but quite a few companies reported better top line and bottom line growth than expected.

“Overall, I would say the result season has been mixed so far, and we continue to be a little more optimistic about the rest of the season,” says Nitin Jain, co-head, Global Asset Management, Edelweiss Capital.

A majority of manufacturing and services firms in the automobile, power, capital goods, construction & infrastructure, telecom and metals sectors, besides public sector banks, are yet to declare results.

The final scorecard could change by the time the result season is over, towards the middle of next month.

Analysts, however, were disappointed by the quarter results of information technology companies like Tata Consultancy Services, Infosys, Wipro and HCL Tech.

These firms reported a combined 600-basis-point year-on-year decline in core operating margins, thanks to adverse cross-currency movements and rise in operating expenses.

The result was a 9.7 per cent annual net profit decline, the first in at least eight quarters, and tepid 8.6 per cent year-on-year growth in core revenues or net sales.

Given IT companies’ large weight in the sample, their show pulled down the entire sample.

IT exporters accounted for Rs 4 of every Rs 10 earned (net profit) by the companies in the sample.

“IT firms were the biggest letdown in the quarter and I remain cautious on the industry’s growth prospects in the near to medium term.

“However, the manufacturing sector is likely to report better numbers because of gains from lower energy and raw material prices, and a stable demand environment,” says G Chokkalingam, founder & chief executive of Equinomics Research & Advisory.

Analysts are pinning hopes on transmission of the recent interest rate cuts by commercial banks.

“Growth and earnings will improve on a sustained basis if interest rates fall from the current level.

“But the Reserve Bank is not giving clear signals and is likely to act only after this year’s monsoon,” says Edelweiss’ Jain.