If financials and oil sectors were removed, India Inc has done quite well.
The combined net profit (adjusted for exceptional items) of around 2,400 companies was down 20 per cent year-on-year (YoY) basis during the March 2016 quarter, largely due to big losses booked by public sector banks as they continue to clean their balance sheets of bad loans.
For Corporate India, this was the worst profit growth in 10 quarters.
Revenue growth was, however, back in the black after being in red for four consecutive quarters.
The combined revenue for the sample was up 1.5 per cent YoY during the quarter, compared to 5.7 per cent YoY decline during the corresponding quarter last year and 3.7 per cent decline during the third quarter.
Revenue includes other income to reflect the operations of banks' fee-based activities.
If financials and oil sectors were removed, India Inc has done quite well.
The combined net profit of around 2,000 companies - excluding banks, non-banking finance companies and oil and gas majors was up nearly 21 per cent YoY during the March 2016 quarter, growing at the fastest pace in the last six quarters.
Combined net revenue of this sample was up 5.4 per cent YoY in the last quarter, growing at the fastest pace in the last five quarters.
Thus, even at the topline level, India Inc's total income was adversely impacted by banks.
However, revenue of the services sector, excluding finance, declined 0.4 per cent in the fourth quarter, growing at the slowest pace in the last seven quarters.
Manufacturing companies, on the other hand, did better than services.
The combined net sales of manufacturing companies ex-oil refiners was up 4.3 per cent YoY in the last quarter, against 0.1 per cent decline in the third quarter and 0.7 per cent growth during the fourth quarter of FY15.
Banks spoil India Inc's Q4 party Analysts attribute the turnaround in revenue growth to the increase in international commodity prices besides higher spend by the government.
"The recent rebound in metal and crude oil prices has helped many companies improve their sales realisation, leading to better revenue growth. Consumer goods companies also gained from higher fiscal spend by the government during the latter half of the last financial year," says Dhananjay Sinha, co-head institutional equity, Emkay Global Financial Services.
Domestic manufacturers, especially steelmakers and sugar producers, also gained from various import barriers put up by the government, leading to a rise in domestic prices for their produce besides reduction in competition from imports.
Profitability was aided by a mix of a mild recovery in revenue growth and continued gains from lower raw material and energy prices.
Core operating margin for the sample - ex-banks and financials - was up 234 basis points (bps) on YoY basis and 58 bps sequentially to 15.2 per cent during the March 2016 quarter. One basis point is one-hundredth of a per cent.
Corporate India's raw material intensity, including fuel and power, declined to 44.5 per cent of net sales during the March 2016 quarter, from a high of 49 per cent in March 2014 and 47 per cent a year ago.
In other words, companies now buy Rs 44.5 worth of inputs for every Rs 100 worth of goods and services sold against Rs 47 till a year ago.
The worry for corporates is the rising wage inflation in the economy.
Employee productivity continues to fall as salary and wages continue to grow faster than the company's revenue growth.
For the entire sample, salary and wages cost was up 17.4 per cent YoY in the last quarter, against 1.5 per cent growth in sales.
For ex-financials and energy, the corresponding numbers were 21.1 per cent and 5.4 per cent year-on-year, respectively.
A combination of higher employee cost and recent increase in commodity prices may put pressure on corporate margins in FY17.
Analysts, however, say that the near-term outlook for corporate earnings is bright, thanks to demand push from higher government spending in the current financial year.
"We expect the earnings (net profit) momentum to continue in FY17, driven by better demand across sectors," says Nitin Jain, president & CEO Global Asset and Wealth Management, Edelweiss Capital.
Others are betting on a good monsoon and recovery in global growth.
"A good monsoon may give a fillip to the farm sector and improve consumer demand. We also need some help from global growth recovery, so that export sector starts growing once more," says G Chokkalingam, founder & CEO, Equinomics Research & Advisory.
FOCUS AREAS
Banks' bad loan provisioning hurts India Inc's profitability
Net profit of firms, excluding financials, grew 21% - best in 6 qtrs
Operating margins improve on lower input costs
Employee cost continues to rise
