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Mumbai: Early trends from corporate earnings for the June quarter indicate a revival in consumption demand and business sentiment, as the economy recovers from the lingering impact of the roll out of the goods and services tax (GST).

Though there was the positive effect of a low base last year, analysts said overall consumption has started to drive volume growth, but profitability of a few companies came under pressure because of higher crude oil prices and the weakening of the rupee against the dollar.

A Mint analysis of 102 listed companies showed that the aggregate net profit, after adjusting for one-time gains and losses, rose 14.3% in the fiscal first quarter, the highest in nine quarters. According to data provider Capitaline, adjusted net profit for the same set of companies grew 0.05% in the preceding three months. The data excludes banks, financial services firms, and oil and gas companies because these companies have different business model or cycle. 

Operating profit margins of these companies widened marginally to 23.59% in the June quarter from 23.33% in the preceding three months. 

ICICI Securities Ltd said key indicators suggest that growth was robust in the six months ended 30 June. However, there is an element of base effect to this high growth, which cannot be overlooked, the brokerage said. 

“Essentially, we are not seeing disappointments in Q1 results so far. In some cases, competitive intensity was high, there were margin pressures and, in some cases, input prices increased so companies did not deliver. Most companies’ results, however, were in line with markets estimates. There has not been any major surprise yet, but it may be too early (to predict) as the results season has just begun. Overall, there has been growth in volume," said Rajat Jain, chief investment officer, Principal Mutual Fund. 

According to Jain, firms focussed on the domestic consumer market, such as cement, paint and fast-moving consumer goods (FMCG), have seen good volume growth in Q1. “Management commentary of cement companies indicate that infra spend is driving volume. FMCG companies continue to remain bullish on rural demand pick up, particularly hopeful that minimum support price (MSP) will drive consumption. For FMCG companies, some portion of the volume growth could be because of the low base last year, but there was growth otherwise, too."

Others seem to agree. Deepak Jasani, head of retail research at HDFC Securities Ltd, said volume growth in cement, trucks and consumer staples was in line with or better than expectations, suggesting consumer spend remained strong both in urban and rural areas.  “Consumption-linked sectors, (except telecom services), are expected to grow in the mid-to-high teens for the fourth consecutive quarter in Q1FY19. This will be aided by improving macros, a pickup in consumer sentiment, and growing rural demand. This apart, the government’s support to farmers and expectations of a third year of normal monsoon will also drive rural spend," Jasani added. 

However, the firms had to spend more on raw material following the rise in crude prices, besides shelling out more as employee cost. In the June quarter, raw material costs jumped 23.97% compared with 7.94% in the quarter-ago period, while employee costs grew 12.44% compared with 7.86% in the March quarter. 

According to Nomura, input costs for consumer firms continued to witness an inflationary trend for a second straight month. “Rising crude prices have led to significant pressure on margins for paint companies," it said in a note on 19 July. Crude prices have risen 9.27% in the year so far, with a jump of 14.25% in the April-June period alone. The Rupee, on the other hand, weakened 7.23% in 2018, slipping 4.81% in the June quarter. 

Analysts see the situation improving, mostly driven by demand growth especially in rural markets. Manish Jain, an analyst at Nomura, said that demand conditions continue to witness marginal improvement, particularly on the rural side, and this trend should be sustained through this fiscal year.

“On the profitability side, the general view now is that operating margins would most likely be maintained at current levels," he added. 

Jasani said that revenue growth for corporate India could come in at high double-digits for the quarter, aided by a supportive base due to de-stocking ahead of the GST last year. 

According to ICICI Securities, rich valuations in a rising cost-of capital environment will continue to be a fundamental constraint for markets to move up sharply. “Earnings downgrade continued post Q4FY18 results although at a much slower pace than last year and would be a key factor to watch out in Q1FY19," it said in a note on 16 July.

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