Corporate earnings for broader India Inc continue to remain under pressure even though some frontline companies – the ones whose stocks constitute indices like the Sensex – have reported better-than-expected second quarter (Q2; July-September) results so far.
Net profit margins or profitability for 101 BSE-500 companies (excluding financials) that have declared their results so far have come in at a six-quarter low of 10.09%.
Rising input costs, along with higher interest outgo and lower other income contributions, seem to have weighed on Q2 bottomlines.
An analysis of quarterly numbers of the 101 BSE-500 companies that constitute more than a third of the overall BSE market capitalisation, shows that aggregate sales growth has rebounded strongly from 5.28% in Q1 to a three-quarter high of 15.24% in Q2. But the rise in input costs has been more severe – up 16.55% on-year, compared to 5.39% on-year rise in Q1.
As a result, operating margins have shrunk by 40 basis points (bps) to 16.08% sequentially, the slowest growth in last six quarters.
Despite the fall in margins, the overall earnings trend so far has been better than expected, thanks to strong growth shown by export-oriented sectors like IT, select automobile, pharma and oil and gas stocks.
Operating profit has seen a rebound to 8.9% in Q2 from 4.7% in Q1. However, the fall in other income due to forex losses and higher interest costs have led to net profit growth coming in at 5.1%. Other income grew at just 2.9% while interest costs went up by 38.4% on-year.
Dipen Shah, head of private client group research at Kotak Securities, says that most of the corporate results declared so far have been either in line or better than expected, even as pressure on margins is showing due to currency depreciation.
All the 10 Sensex companies that have declared their results so far have beaten or met the consensus analyst estimates of both profit and sales.
Experts believe that these are early days still, and that the results in the second half of this fiscal may disappoint as domestic investment and infrastructure companies are yet to announce their results.
Anand Shah, chief investment officer at BNP Paribas Mutual Fund, says that the market currently is very polarised with companies related to export and B2C (business-to-consumer) segment doing very well. “On the other hand, the B2B (business-to-business)-oriented companies and those related to domestic infrastructure projects are not doing well. Though the B2C segment is able to extract more by passing on higher input costs to consumer, the margins will continue to remain under pressure for those in the B2B segment because of their low pricing power.”
The Q2 numbers so far show that strong growth has been led by IT stocks that have seen, on an aggregate, a 27.7% rise in revenues and a 25.9% profit growth.
Excluding IT and oil & gas stocks, aggregate sales growth for the BSE-500 companies comes down to 10.58%, while the net profit growth becomes a minus 2.7%.
Going ahead ,experts don’t see sales growth and profit margins rebounding in a hurry, given that any economic growth revival is likely to be slow.
“There are structural elements to the earnings slowdown and contraction of margins – competition is rising in most sectors and wage levels structurally are likely to be much higher than they used to be five years ago. However, there is an obvious cyclical element driven by the sharp slowdown in the economy. Our view is that both the economy and earnings will recover slowly over the next 12-18 months,” wrote Jyotivardhan Jaipuria, head of research at Bank of America Merrill Lynch (India) in a report last week.