Early bird Q2 numbers off to promising start

The combined revenues of these firms were up 33.1% YoY, growing at the fastest pace in at least three years

Illustration: Uttam Ghosh/Rediff.com

Early bird results at India Inc suggest the earnings season has started on an optimistic note, thanks to better-than-expected earnings growth by three of the country’s top firms - Reliance Industries (RIL), Infosys, and Hindustan Unilever.

Tata Consultancy Services (TCS) and HDFC Bank also helped, by reporting numbers that were largely in line with Street expectations.

The combined net profit of the 76 listed companies in our sample was up 17.2 per cent year-on-year (YoY) during the July-September 2018 (Q2) quarter, growing at the fastest pace in the last three quarters.

The combined revenues of these firms were up 33.1 per cent YoY, growing at the fastest pace in at least three years.

The latter was driven by RIL, whose revenues were up 57 per cent YoY, thanks to a spike in fuel prices (see adjoining charts).

With combined net profit of Rs 33,800 crore and revenues of Rs 3 trillion during the quarter, early bird companies in our sample represent a third of the listed companies in terms of net profit and 16 per cent in terms of revenues, based on companies’ average earnings and top line in the last four quarters.

Typically, early bird companies are among the most profitable in India Inc and the earnings scorecard worsens as more companies declare their quarterly earnings.

The quarter belongs to information technology (IT) exporters such as TCS and Infosys, which have regained growth momentum, thanks to a combination of global economic recovery, gains from rupee depreciation, and a low base last year.

Both combined net sales and net profit of software companies grew 19.8 per cent YoY each in Q2, the fastest pace in at least three years.

Industry’s margins are on an upward trajectory as top line growth outpaced salary and wages for the second consecutive quarter.

Employee costs account for nearly 54 per cent of revenues on average and are a key determinant of margins in the industry.

The early bird sample has 10 companies that are part of the Nifty50 index.

The combined net profit of these index companies was up 16.5 per cent YoY during the quarter.

However, besides the companies mentioned above, the environment for manufacturers and domestic market-focused companies appears challenging from the numbers.

For example, the combined net profit of companies (ex-RIL, financials, and IT exporters) was up just 3 per cent YoY during the quarter, despite a healthy 17.6 per cent YoY growth in their net sales during the quarter.

Analysts attribute the margin squeeze due to a steady rise in commodity and energy prices in the last 12 months.

“Most sectors are likely to face margin pressure due to a combination of rising input costs and sharp depreciation in the rupee against major currencies,” says Dhananjay Sinha, head of research, Emkay Global Financial Services.

Companies in sectors such as automobiles, cement, telecom, and building materials are likely to be the worst affected.

This explains why two-wheeler maker Hero MotoCorp and UltraTech Cement reported a decline in net profit during the quarter.

The core operating margins for domestic manufacturers (ex-RIL, financials, and IT services) was down 123 basis points on a YoY basis to 16 per cent (of net sales) in Q2 of the current fiscal year as companies’ expenditure on raw materials, power, and fuel outpaced their net sales growth.

The results also show the impact of recent spike in bond yields and interest rates as interest cost grew faster than revenues and operating profit across sectors.

For the entire sample, interest costs were up 31.1 per cent YoY during the quarter, against 19 per cent growth in operating profit, resulting in a decline in companies’ interest coverage ratio during the quarter.

Interest cost for domestic manufacturers was up 25 per cent YoY during the quarter, outpacing operating profit (up 5.2 per cent) growth by a wide margin.