Indian economy recovering? Q4 corporate results say so

After a poor report card during the first nine months of financial year 2015-16, corporate results for the fourth quarter offer hope of a recovery.

The combined net sales of 350 companies, which have declared results so far, were up 5.6 per cent year-on-year (y-o-y) for the quarter ended March 31, 2016. This marked the fastest growth in the past six quarters.

Before this, these companies had reported a decline in revenue for four consecutive quarters.

The combined net profit (adjusted for exceptional gains and losses) was up 16.9 per cent y-o-y, growing at the fastest pace in the past six quarters.

The reported net profit was, however, down 8.8 per cent y-o-y, resulting in a decline in companies' underlying earnings per share.

This was largely because of Cairn India, which took an impairment charge of Rs 11,674 crore or Rs 116.74 billion on account of lower crude oil prices and adverse long-term impact of revised cess on its Rajasthan assets.

The recovery was led by information technology exporters, a few private sector banks, non-banking financial companies, and individual companies such as Reliance Industries and Eicher Motors.

In comparison, energy producers such as Cairn India and capital goods makers were laggards.

The combined net sales of these companies were Rs 4.13 lakh crore or Rs 4.13 trillion in the fourth quarter of FY16, compared with Rs 3.91 lakh crore in the corresponding period a year ago.

At the same time, adjusted net profit grew to around Rs 55,000 crore or Rs 550 billion, from around Rs 47,000 crore or Rs 470 billion.

The analysis is based on the January-March 2016 quarter results for 350 companies, whose comparable numbers are available for the past 16 quarters. The sample excludes Vedanta and HCL Technologies.

The numbers, however, suggest that likely recovery in the domestic economy remains modest and is a work-in-progress.

The combined net sales of 196 manufacturing companies in the sample were up 5.8 per cent y-o-y in Q4, up from 3.8 per cent growth a year ago, and 3.9 per cent y-o-y growth in the third quarter.

Their combined net profit (adjusted for exceptional items) was up 15.8 per cent y-o-y against 4.6 per cent growth last year.

Manufacturers continue to benefit from lower commodity and energy prices though the gains seem to be plateauing.

The raw material intensity declined to 44.6 per cent of net sales from 45.5 per cent a year ago, but was up nearly 20 basis points on a sequential basis, reflecting recent increase in landed cost of commodities in the domestic market, especially in steel and sugar.

Energy cost was down 30 basis points on annual and sequential basis to 4.3 per cent of net sales in Q4.

Core operating margin (excluding other income) for manufacturers was up 57 basis points on annual basis and 77 basis points sequentially to 14.1 per cent of net sales in Q4.

Earnings before interest, taxes, depreciation and amortization (Ebitda) margins, which include gains from other income, climbed to four-year high of 18.2 per cent in Q4. One basis point is one-hundredth of a per cent.

Bad news came from services sector, excluding IT exporters.

Combined revenue of sectors such as transport and logistics, hotels, real estate, telecom, retail and trading declined for the second consecutive quarter, while their net profit was down 21.8 per cent y-o-y in Q4.

While a few finance firms and private sector banks did well, overall numbers of the financial services sector showed weakness with y-o-y slowdown in sales growth and net profit.

The combined interest income was up 13.8 per cent y-o-y in Q4, down from 16.5 per cent growth during the same period last year.

Profit growth fell sharply to 4.2 per cent, from 17.9 per cent last year.

IT exporters such as Tata Consultancy Services, Infosys, Mindtree and Persistent Systems were stars of the quarter.

Their combined revenue was up 17.6 per cent y-o-y in Q4, growing at the fastest pace in past seven quarters.

The adjusted net profit vaulted by 33.5 per cent y-o-y as TCS employee cost normalised after a hefty special bonus last year.

All eyes are now on old economy heavyweights such as Tata Motors, Tata Steel, GAIL, Hindalco, BHEL, Larsen & Toubro, ITC and Hindustan Unilever which are yet to declare results beside public sector behemoths in banking and commodity sectors.

Image: A stock trader reacts. Photograph: Reuters