No signs of a revival in earnings in June quarter
Weak demand, slow private sector capital expenditure, liquidity tightness and sluggish government spending in the poll season continued to take its toll on corporate India’s earnings in the June quarter.
Net profit fell by 5.23% for the three months ended June 30 from a year earlier, showed a Mint analysis of 1,284 listed companies.
While the June quarter earnings were incrementally better than those of the preceding three months, in which they fell by 8.46%, a full recovery may still be far away. In the same quarter last fiscal, the same set of companies had registered a yearly earnings growth of 21.1%.
Analysts said revenues of some companies were hit by muted volumes owing to low discretionary spends, rupee fluctuations, slow progress of the monsoon and delayed private sector spending, while lower prices of commodities such as crude oil offered some respite. In the June quarter, net sales grew 4.6%, an eight-quarter low, slower than the 14.2% growth in the preceding three months, according to data provider Capitaline. This compares to net sales growth of 19% in first quarter of FY19.
During the quarter, operating profit margin narrowed to 19.42% from 19.56% a year earlier. The review excludes banks, financial services and oil and gas firms, as they follow a different revenue model. The overall performance in terms of revenues was more or less as expected, but results disappointed on the margin front despite soft commodity prices and cost control initiatives undertaken by most corporates, said Deepak Jasani, head of retail research at HDFC Securities Ltd. He said management outlook has turned extremely cautious across the board due to lack of pricing power and intense competition.
“Management commentary and channel checks are displaying negative trend indicating overall demand weakness due to liquidity, weak sentiments and rural slowdown. A lacklustre festival season is set to compound problems for India Inc,” he said. “While PSU capex will continue (though, at a slower pace), private capex is still some time away given the headroom in capacity utilization available and uncertainties on adding capacities at a time of global uncertainty.”
Others agree. Stating that overall earnings have been slightly below expectation, Rusmik Oza, head of fundamental research at Kotak Securities, said adjusted net profit of Nifty companies, excluding banks, financials and oil and gas, have fallen 11% on a year-on-year basis, although revenue growth has been healthy at 5%. “Ebitda margins seem optically better due to positive impact of Ind-AS 116 implementation from Q1 FY20. However, equivalent negative impact in the form of higher depreciation and amortization has impacted earnings of companies,” said Oza.
As crude and prices of other commodities fell in the June quarter, companies benefited from lower raw material costs. During the quarter, raw material prices rose 0.22%, down from an increase of 10.9% in the previous quarter and 21.5% in the first quarter of the previous fiscal. In the quarter, Brent crude prices fell 2.69%, while LME copper fell 7.78% and LME aluminium declined 5.98%.
Of the total, net sales of 800 manufacturing firms was at a 14-quarter low, with a growth of 2.65% in the June quarter, while it was 16.2% in the March quarter and 27.9% in Q1FY19. Adjusted net profit of these companies fell 10% in Q1FY20, compared with an 11.2% drop in the March quarter and 36.7% growth in Q1FY19