India Inc’s operating performance in April-June so far is the weakest in the last 11 quarters, as companies continue to struggle with falling revenue growth.
An analysis of the quarterly results declared by 141 companies from the BSE500 (excluding banks and financials), which represents nearly 40% of total market capitalisation, shows that operating profit margins have dipped by over 220 basis points over the last one year.
Experts attribute the pressure on operating profit to falling demand and lower order book of manufacturing companies.
“The trend of operating margin compression continues along expected lines. The uncertain environment and volatile currency movements have weighed on core profitability,” said Ajay Bodke, head - investment strategy & advisory at Prabhudas Lilladher.
The growth in operating profit or the profit earned from normal core business operations has been just 1.8%, the lowest in nearly two years as expenditure outgrew revenues.
“Though there has been easing of pressure on the expenditure side, lower order book and demand along with limited ability to pass on price hikes are showing in lower operating profit growth,” said Nischal Maheshwari, head of research at Edelweiss Securities.
Topline growth in the June quarter has been 15.5%, the lowest in two-and-a-half years.
While lower commodity prices have impacted the sales growth for commodity companies, sagging demand has impacted the automotive space.
Dipen Shah, head of private client group research at Kotak Securities said there have been too few positive surprises.
“The earnings so far have been either in-line or lower than expectations, with only a few companies like HCL Technologies, ICICI Bank, Larsen & Toubro delivering beats. Software companies have disappointed on the dollar revenue growth front, while for manufacturing and capital goods space, the margins were lower than expectations,” he said.
Other income derived from non-core business rose 37.1%, aiding bottomline growth which currently stands at 6.7%.
The biggest drag on bottomline growth has come from Reliance Industries, Sterlite Industries and Maruti Suzuki with their net profits falling 21%, 26.9% and 22.8%, respectively. On the other hand, Cairn India, TCS, Infosys, ITC and NTPC have reported 20-40% growth in bottomline.
The earnings season has seen some positives too in the form of fast moving consumer goods companies still holding fort, while infrastructure and capital goods companies have reported decent order book growth. But experts believe that one needs to watch if the trend would continue.
“In the case of infrastructure and capital goods space, the order book position has been better as analysts had not expected much. For consumer goods space, though there has been no major slowdown, one needs to keep an eye on monsoons. If monsoons aren’t good, it would be difficult for these companies to pass on price hikes amidst reducing consumer affordability,” said Shah.