Demonetisation impact on BSE firms’ December quarter results

An overall analysis of Q3 results reported by BSE companies shows that Indian firms weathered the worst of the fallout from demonetisation


For confirmation of a recovery in corporate earnings growth, investors have their sights set on the March quarter financial results. Photo: Aniruddha Chowdhury/Mint
For confirmation of a recovery in corporate earnings growth, investors have their sights set on the March quarter financial results. Photo: Aniruddha Chowdhury/Mint

Mumbai: Indian companies kept their eyes on the ball and did fairly well in the December quarter, despite the upheaval caused by the November ban on old, high-value banknotes. While sales volumes in some sectors were hurt, a number of companies made up by tightening their belts. Net profit of Sensex companies rose 0.8% year-on-year, after adjusting for exceptional gains and losses, according to data collated by Kotak Institutional Equities.

Of course, this is not to say that demonetisation did not impact the performance of Indian companies. Volume growth was weak and even negative in a number of sectors—such as automobiles—and credit offtake was weak in the banking sector. “Underlying volume trends disappointed across sectors, especially in the case of PSU (public sector undertaking) banks (credit), consumer staples, cement and industrials, as the disruption to the economy in the second half of 3QFY17 due to demonetisation exacerbated the prevalent subdued demand conditions,” Kotak’s analysts wrote in a note to clients.

The markets, meanwhile, appear to believe all of the Indian economy’s woes are behind them. Valuations have risen sharply nearly across the board, and are now at levels similar to previous occasions when irrational exuberance ruled the day. “The market seems quite unperturbed about ‘high’ valuations despite an uncertain earnings outlook and unhelpful global and domestic interest-rate cycles. Investors have chased valuations to ‘high’ levels on expectations of a strong recovery in the economy and earnings. We expect a slow economic recovery”, Kotak’s analysts wrote in the recent note.

Coming back to the December quarter results, there were hardly any signs that the recovery picked up pace. As mentioned earlier, sales of automobile companies, particularly makers of two-wheelers and commercial vehicles, were weak. Commercial vehicle sales had picked up in October, but fell post-demonetisation.

For most large-sized consumer goods companies, volumes fell, reversing the trend of single-digit growth in previous quarters. For instance, Hindustan Unilever Ltd’s volumes fell 4% and Colgate Palmolive India Ltd’s volumes fell as much as 11%. Some cement makers reported declines in sales, although this was similar to the trend in the September quarter. Overall volumes were flat largely because of growth in southern markets.

Credit off-take weakened post-demonetisation with overall credit declining to a 20-year low, according to Kotak’s analysts. Credit to industry was down 4% in end-December. “The year-on-year decline in loans in the industry segment reflects (a) lack of new projects to finance, with the refinancing of extant loans the only real activity in the industry segment and (b) the reluctance of banks to lend to the industry and infrastructure sectors,” Kotak’s analysts wrote. The silver lining is that non-performing loans appear to have peaked, and are not wreaking havoc on banks’ financial statements as they were about a year ago.

Order inflows at capital goods companies declined, compared with decent growth in the previous quarter. At the same time, the revenue of these companies increased. While the growth in revenue is heartening, unless the size of the order book picks up, growth of the sector will be muted.

Reliance Jio Infocomm Ltd’s free services took their toll on Bharti Airtel Ltd and Idea Cellular Ltd, with the latter even reporting a net loss. And growth in India’s information technology services exports continued to decline. Growth in organic revenue of top-tier firms has fallen to around 7%, from around 9-10% a year ago. On the other hand, companies in some sectors such as metals and energy did well, thanks to a low base in the year-ago period—thanks in turn to favourable commodity prices.

In less than a month, when companies start reporting March quarter results, it will become clear whether the demonetisation impact was only temporary and whether there are clearer signs of a recovery.

A look at how the various sectors performed during the December quarter:

AUTOMOBILES: A blip in growth as demonetisation cripples sales

AVIATION: Turbulent journey in the December quarter

BANKS: A bleaker FY17 likely

CAPITAL GOODS: No broad based recovery in order inflows yet

CEMENT: After demonetisation, rising costs, unfavourable volume base to hurt

FMCG: GST and urban consumers offer hope

INFRASTRUCTURE: A subdued December quarter for infra firms

IT SECTOR: Donald Trump, Rupee worsen matters in December quarter

METALS: Waiting for domestic consumption to pick up speed

OIL & GAS: A subdued performance in the December quarter

PHARMA: Recovering in fits and starts

POWER UTILITIES: Eye on key milestones help overcome subdued Q3

REAL ESTATE: Companies with commercial portfolio score

RETAIL: Retailers post better than expected numbers

TELECOM: Reliance Jio wreaks havoc on Q3 results of telecom firms

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