Corporate earnings so far this quarter the worst in six

Operating profits of Indian companies grew at the slowest pace in six quarters as input costs raced way ahead of sales growth in the July-September period.

The growth in operating profits of 276 companies (excluding banks and financial institutions) — accounting for a quarter of the total market capitalisation on the bourses — which have declared their second-quarter results so far, stood at a mere 4% year on year compared with an average 25% over the previous five quarters. A slower growth in topline is mainly to blame.

“Clearly, there has been pressure on margins as companies could not pass on the price hikes in line with the growth in operating expenses related to input raw material and employee costs,” said Dipen Shah, head - fundamental research, Kotak Securities.

The net revenues grew at a decent 25.5% year on year, but the increase in total expenditure was higher at 30.4%. As a result, the operating margins stood at 15.5%, almost 290 basis points lower than that seen in the last 10 quarters.

Heavyweights like Reliance Industries, Infosys and Bajaj Auto reported single-digit growth in operating profits.
However, Cairn India (66.3% down), JSW Steel (down 23.4%), Exide Industries (down 63.2%) and Crompton Greaves (down 32%) reported a decline.

“The results have not been great because of margins and guidance from the management. The guidance is not very robust. In the case of capital goods, there is slowdown in both the domestic and export markets. Geographies such as the Middle East are slowing down faster than expected,” said Satish Ramanathan, head of equities at Sundaram Mutual Fund.

As if the weak operating performance wasn’t enough, the quarter also saw a substantial drop in other income and a huge increase in interest costs, which limited net profit growth to just 11.4% compared with average 30% seen in the previous four quarters. Other income fell 72%, while interest costs rose more than 40% year on year.

“The fall in other income could have been due to hedging or translational losses due to foreign exchange fluctuations in case of IT companies or rise in one-time expenses for a few companies. The frequent interest rate hikes over the last one year have also led to higher interest expenses,” said Shah.
However, a few companies bucked the trend of falling profits, like

Hero MotoCorp, which reported a 51.1% growth in operating profit. UltraTech, Idea Cellular, HCL Technologies, Hindustan Zinc and TCS also reported strong numbers.

The results of IT companies have been surprisingly positive.
“Even as there were expectations that IT companies may show some caution in guidance, there are no signs of concern seen over next 1-2 quarters for these companies,” said Shah.

Corporate earnings so far this quarter the worst in six
The tough times are seen continuing for industrials and interest sensitive sectors.

“Margins are under pressure. While inflation continues to remain firm, rates are already high. The Reserve Bank of India may choose to keep it at the same level rather than hike it further in a bid to control inflation. There are concerns on asset quality of banks, especially among PSUs,” said Swapnil Pawar, chief investment officer, Karvy Private Wealth.