Mumbai: The recovery in profit growth slowed in the March quarter despite signs of rising rural demand and the effect of demonetization and the goods and services tax (GST) tapering off, data showed.

A Mint analysis of 1,372 listed companies based on Capitaline data, showed aggregate net profit, after adjusting for one-time gains and losses, rose 13.88% in the March quarter, against 17.08% in the third quarter.

However, this was much higher than the 2.71% growth seen in the corresponding quarter of the previous fiscal year. For 32 Nifty firms, adjusted net profit growth was at 3.16% from 7.63% during the period.

In the third quarter of FY17, it was negative 7.60%.

The review excludes banks, financial services companies and oil and gas companies.

Operating profit margin of the 1,372 firms was flat at 21.28% in Q4 from 21.03% in the previous quarter.

According to Kotak Mutual Fund managing director Nilesh Shah, there was noticeable divergence within sectors.

“By and large, IT, private banks, large cement companies, auto, FMCG, media, OMCs and metals delivered results in line with, or ahead of, market expectations. The disappointment came from private sector and PSU banks, telecom, gas, pharma and building materials." Shah added that the after-effects of GST and demonetization seemed to have faded and there has been good growth in the rural sector. “Improvement in the recovery rate of microfinance companies also gave confidence on the improvement in rural sector."

Nischal Maheshwari, head of institutional equities at Edelweiss Securities Ltd, said the disappointments were present in some part of the consumer durables space, wherein demand was still soft, and the rise in input costs were weighing on their margins. “However, it is encouraging to see some signs of rural recovery with FMCG and two-wheelers posting good sales."

Deepak Jasani, head of retail research, HDFC Securities Ltd, said: “Q4 numbers reflect stark differences between the top 400-500 companies and the rest. The top ones have largely remained flat or reported better numbers than the previous year, while the rest have shown worsening performance, raising concerns over their future growth or survival.

Demonetization and GST may have challenged the business models of a lot of companies and they are yet to come to terms with them."

Although Brent crude prices surged 3.98% in the January-March period, raw material costs of the 1,372 companies had declined during the period.

Year-on-year growth in raw material costs for these companies were at 14.94% in the March quarter, against 17.26% in the preceding quarter. It was 8.04% in Q4, FY17.

According to Abhiram Eleswarapu, head of India equity research at BNP Paribas, within consumer discretionary, commodity inflation continued to hurt margins, but stronger companies with pricing power and operating leverage had managed their costs better. “Consumer staples companies saw strong pick-up in volume growth even on a normalised base and the commentary around rural demand was bullish."

Vinod Karki, vice-president, strategy, ICICI Securities Ltd said that operating profit in the fourth quarter has been impacted due to rising input costs of companies, although topline has been robust. However margins, except for consumer companies, are peaking out. “Margins are not expanding beyond consumer companies. Going forward, margins of these companies are expected to fall because this quarter, oil prices have been very high. Usually, there is a lag effect of price increases on these companies’ profitability. Management commentary has been about defending their margins. These companies have been trying to maintain their margins by cutting costs but higher input costs will soon catch up. That brings another risk as once there is an increase in product price, it may hurt demand growth," Karki said.

Meanwhile, employee costs of the same set of companies climbed to 15.35% in March quarter from 9.32% in the December quarter. Interest cost in Q4 was at 4.15%, a significant rise from a negative 0.86% in quarter-ago period. Interest coverage ratio, which measures a firm’s ability to cover its interest costs, was at a 22-quarter high.

Jasani of HDFC Securities said said typically, employee costs increase in Q4 due to bonus payments and actuarial valuations.“Post NCLT and IBC, banks have become strict on loan disbursements because of which companies (apart from top rated ones) faced liquidity issues and had to borrow from other sources like inter-corporate deposits, commercial papers etc at higher interest rates. Interest rates also were on the up in Q4. Effective tax rate also went up for some as companies lost out of tax exemptions due to time lapse," he added.

Going ahead, analysts are concerned that sustainability of earnings growth will be important while crude and rupee will play important factors. Shah said, “The biggest concern for the market is sustainability of earning growth in FY 19...There is a credit squeeze in the economy with liquidity becoming tighter with forex intervention and increase in currency in circulation as 11 out of 21 PSU banks are in prompt corrective action (PCA). They are not lending money to their clients. Other PSU banks are also not as willing lender as before. The tight liquidity along with high real interest rates and higher oil prices could have an impact on the earnings growth." He feels earnings momentum will see a pick up if oil prices soften and liquidity flow improve.

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