Even as the renewed softening of global crude oil prices and a slide in the prices of other commodities offers an additional measure of comfort to the Indian economy, the corporate sector is clearly struggling to improve its topline growth. The lower input prices, though, are beginning to translate into a discernable improvement in the bottomlines of most BSE 500 companies.
In line with the weak corporate performance for the fourth quarter ended March 2015, the financial year 2015-16 too started on a weak note. An analysis of the group of 211 companies from the BSE 500 that announced their first quarter result ended June 2015, till Wednesday (except banks and financial institutions), shows that their year-on-year net sales declined by 5.3 per cent but their profits rose 6.4 per cent during the quarter. For investors, the earning numbers distill down to a clear trend — that while the debt-laden large cap firms have struggled to maintain profitability, the mid-cap firms have done much better on registering profits. On the whole, these companies saw a sharp fall of 18 per cent in raw material expenditure during the quarter, a prime driver of profitability.
Big companies take bigger hit
A closer look at the numbers reveals that the earnings performance is not uniform across the different categories. While the large cap companies (with a market capitalization in excess of Rs 25,000 crore) faced the maximum stress in terms of their topline growth and showed only a marginal growth in their net profit, the mid cap and small cap companies beat them hands down in terms of growth numbers during the quarter.
For the group of 47 large cap companies in the list, the profits went up by 1.9 per cent despite their revenues falling by 8.6 per cent. This came as the raw material expenditure for the group of companies fell sharply by
24 per cent during the quarter. This group however also witnessed a jump in the interest expense by 18.7 per cent during the quarter as the companies continued to reel under high debt. For the group of 74 mid cap companies (in the list) classified as those having market capitalisation between Rs 5,000 crore and Rs 25,000 crore, while the net sales grew by almost 2 per cent, the net profit jumped 36 per cent from Rs 5,803 crore in the quarter ended June 2014 to Rs 7,902 crore in the quarter ended June 2015.
Even the small cap companies, classified as those having a market cap of less than Rs 5,000 crore, posted better performance in terms of revenue growth. The net sales for the group of 90 small cap companies that announced their results and are part of BSE 500, rose by a healthy 8.4 per cent while the net profit rose marginally by 5.4 per cent during the quarter. Even on the interest expense front, it can be seen that the group of large cap companies witnessed the maximum rise during the quarter. The interest expense for the large cap companies rose by 18.7 per cent from Rs 4,197 crore to Rs 4,984 crore. In comparison, the group of mid cap companies in the listed saw their interest expenditure decline and the small cap companies saw it marginally rise by 5.8 per cent.
Risk of earning downgrade dips
While the brokerages were not expecting much from the India Inc in terms of their quarterly results for the last concluded quarter there has been no improvement in broad growth parameters that include — credit growth, NPAs with banks, volume pick up in cement or consumer staples and also order inflows for companies. This is leading to some research houses downgrading their earnings growth targets.
Kotak Institutional Equities, which has cut FY16 and FY17 Sensex earnings estimates by 2 per cent this earnings season expects to bring it down further by the end of the earnings season as well as in the July-September quarter. For Nifty 50 companies the research house has already cut its net profit expectations for FY16 and FY17 by 13 per cent from the peak levels. There are, however, others who are more confident about the earnings growth of the companies going forward. A Deutsche Bank report has said that the worst of earnings cut may be over for India. The earnings revision by the research house (for the group of 49 companies they cover) stood neutral for the first time in this calendar. While the Deutsche Bank analysts raised their earning expectation for 23 firms for FY’16, they cut their expectation for 26 companies. Similarly for FY’17, while their revised their expectations upwards for 25 companies, they cut their expectations for 24 firms.
The research house feels that the macroeconomic factors are turning positive now.
“Until now, cuts had far exceeded raises as Dec’14 and Mar’15 earnings had been largely disappointing. The worst of earnings cuts may be over as several macro indicators are showing improvement, the government has started to spend, and earnings have already been cut sharply since the start of the year,” said the Deutsche Bank report.
Sectors leading and lagging
Though the government expenditure on infrastructure development is expected to rise, the capital goods, cement and real estate sectors continued to remain under stress and the companies operating within them witnessed a decline in their profitability. Order inflow of some of the prominent engineering and capital goods players witnessed y-o-y drop in the quarter. While L&T’s order book stood at a healthy Rs 2.4 lakh crore, due to lack of pick up in the Metallurgical & Material Handling and heavy engineering segments, the capital goods major reported a 21 per cent decline in the order inflow and a 37 per cent drop in net quarterly profit compared to last year.
The silver lining came in the form of automobile sector as both the two wheeler and the passenger car segments posted a significant rise in their topline and bottomline growth. While the net sales for the group of firms rose by 11 per cent, the net profit jumped 42 per cent. Maruti, Eicher Motors, Bajaj Auto and Hero MotoCorp reported strong numbers. Pharma continued to outperform but FMCG firms witnessed flat revenue growth and a marginal rise in the net profit. Although players including Dabur and Godrej Consumer managed to report strong volume growth, Hindustan Unilever reported a muted volume growth of 6 per cent despite passing on the benefit of lower commodity prices in terms of price cuts in soaps and personal product categories.
For the banking sector the asset quality remains a concern. Some big PSBs like Punjab National Bank, Bank Of India and Union Bank reported a double digit drop in their profit compared to last year. With a slowdown in uptick of non-food credit, even NBFCs showed higher asset quality stress.
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