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Interest was the fastest-growing cost head in the December quarter, suggesting high debt continues to trouble corporate India.
If the early-bird results for October-December 2015 are any indication, investors should stay prepared for another quarter of poor corporate earnings.
The 194 companies that have so far declared their results for the quarter have seen their combined net profit increasing 7.4 per cent over the same period a year earlier; against an 11.2 per cent year-on-year expansion in the July-September quarter.
This sample's combined net sales have declined 2.6 per cent on a year-on-year basis, which is an improvement from a 6.5 per cent decline reported during the previous quarter.
The core manufacturing sector and those driven by domestic demand remain under pressure, despite gains from lower commodity and energy prices.
The combined profit of 121 companies (excluding energy, financial and information technology services companies) declined 0.8 per cent in the December quarter from a year earlier -- the first profit contraction in eight quarters.
Their net sales during the quarter were up 5.8 per cent, the same rate as in July-September.
There have been few signs of deflation, with most manufacturing companies reporting faster revenue growth than underlying growth in raw material and energy costs.
Gains from lower input costs were eaten up by rising interest burden and poor demand growth.
Interest was the fastest-growing cost head in the December quarter, suggesting high debt continues to trouble corporate India.
The combined interest cost for companies excluding energy, financial and IT ones was up 24.8 per cent, the fastest pace in eight quarters.
As a result, the interest coverage ratio declined to a three-year low of 6.5 per cent.
This could get worse, as most highly indebted companies are yet to declare their numbers for the quarter.
A string of better-than-expected profit growth numbers by a handful of heavyweights like Reliance Industries, Asian Paints, Kotak Mahindra Bank, IndusInd Bank and UltraTech Cement was undone by a poor show by another set of heavyweights like Hindustan Zinc, Hindustan Unilever, and IT giants like Infosys, Wipro and HCL Technologies.
Things could move in either direction as large manufacturing companies in the private and public sectors are yet to declare their results.
But the bias is towards a further deterioration in profitability, given the stress in energy, metals & mining, capital goods and infrastructure firms, among others.
Companies continue to accrue gains from lower commodity and energy prices.
The combined raw material and energy costs during the December quarter for the 121 companies (ex-energy, financial and IT) was down 4.8 per cent on a year-on-year basis, against a rise of 5.8 per cent in their net sales.
As a result, the operating margin was up 60 basis points year-on-year to 24.4 per cent during the quarter.
The biggest beneficiaries were airlines, cement, paint, power generators and fertiliser companies.
Gains from lower commodity prices seem to be plateauing, however, with the operating margin down 50 basis points on a sequential basis. One basis point is a hundredth of a percentage point.
Growth and profitability in the IT services sector, a big growth driver for corporate results in the past, are showing fresh signs of a slowdown, with a sequential decline in revenue and profit growth in the December quarter.
The industry, however, continues to outperform the manufacturing sector.
The private-sector banks and non-banking financial services companies have also beaten the entire sample in growth and profitability, but the pace of growth has slowed down further.
Consumer goods majors Hindustan Unilever and ITC have taken a knock from a slowdown in private consumption, especially in rural areas. The rate of underlying volume growth was, however, higher than the revenue growth rate they claimed; the mismatch was attributed to a price deflation.
A stress in rural India was reflected by the non-banking financial companies, such as Mahindra Finance and L&T Finance, which reported further increase in their non-performing assets during the December quarter.
The image is used for representational purpose only. Photograph: Reuters
