Mumbai: Annual net profit growth for 43 of 50 companies that constitute the Nifty index has risen 30.16% in the three months ended 30 September, the highest in 19 quarters, although revenue growth of 14% is at its lowest in five years, a Mint analysis has found.
The surprisingly robust growth in net profit when sales expansion is sluggish has been due to so-called other income, or earnings from non-operating activities such as treasury operations, foreign exchange gains, and sale of investments.
The main reason for this extraordinary scenario is because there’s a slowdown in the investment cycle, said analysts, who were cautious about the future growth of corporate earnings.
“Companies have been generating cash from operations but not deploying it back to create capacity,” said Jagannadham Thunuguntla, head of research at SMC Global Securities Ltd, a brokerage. “So the idle cash is earning treasury income. There is no core growth in profitability and slow sales growth is indicative of the problems in the economy.”
The economic situation in the US, Europe and China will be vital in determining the way earnings of Indian companies head in the coming quarters.
“If the European recession persists and the fiscal cliff in the US leads to a recession, I can’t imagine where topline growth for Indian companies will come from,” Thunuguntla said. “The concern also is that if the economy remains sluggish, companies turn sceptical about any signs of recovery being shot-lived and refrain from investing more capital.”
If banks and oil and gas companies are excluded from the list of 43 firms, the growth in net profit for the remaining 30 is the best in 10 quarters at 29.2%, while growth in revenue at 11.61% is the worst in three years.
Earnings of banks and oil companies depend on factors such as interest income and international crude oil prices.
For the 43 companies, aggregate other income in the September quarter is the highest in at least seven years at Rs.24,248 crore. This is around 21% higher than the preceding three months ended 30 June.
For the 30 Nifty firms mentioned earlier, other income is at a seven-year high at Rs.9,220 crore. In fact, such income contributed one-third to the combined net profit of these firms, the highest proportion for any quarter over a similar period.
Other income earned by companies may also have been aided by the rupee, which strengthened against the dollar in the September quarter, a reversal of the trend in the preceding three months.
Between July and September, the rupee gained 5.25% against the dollar, while it had depreciated 8.56% between April and June.
A weak dollar helps companies such as information technology (IT) firms that earn in foreign exchange as their revenue in rupee terms rises. Also, the likes of oil refiners benefit from a lower crude cost in rupee terms.
Some sectors that “surprised positively” in the September quarter, according to a 5 November note by Religare Investment Research, included auto makers, largely led by Mahindra and Mahindra Ltd; consumer goods, driven by a strong performance from ITC Ltd, energy by Reliance Industries Ltd and Petronet LNG Ltd; construction and infrastructure led by Larsen and Toubro Ltd; and IT due to another strong quarter for HCL Technologies Ltd, led by higher margins, and Tata Consultancy Services Ltd on strong volume growth.
Public-sector banks such as Punjab National Bank and Bank of India; power firms such as Power Grid Corp. of India Ltd and NTPC Ltd; and retail chains such as Bata India Ltd and Shoppers Stop Ltd were the key laggards during the quarter, the report said.
“Overall, we see a very slight upward bias in aggregate earnings post Q2 (July-September) as constructive for the market and providing some support post the reform-led rally, though we would stress that this is evidence of stabilization in corporate results...and not the beginning of an upgrade cycle,” said a 7 November report by Espirito Santo Investment Bank Research.
Espirito Santo had said in October that the earnings cycle “had broadly bottomed out, given moderation in commodity prices in rupee terms and a peaking of interest costs”.