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Early Q4 earnings point to a slowdown in economy

  • Growth in aggregate net profit of 124 BSE-listed firms at lowest in at least 13 quarters
  • Operating profit margins widened marginally to 21.88% during Q4 from 21.69% in the preceding quarter as firms cut costs

MUMBAI : Early March quarter earnings indicate that the Indian economy has slowed and the much-awaited revival in earnings growth may be delayed further, developments that are likely to deepen investor unease about stock valuations and a more than two-month-old stocks rally.

A Mint analysis showed that slower sales have dragged profits of companies that reported earnings for the quarter ended 31 March to the slowest in at least 13 quarters even as BSE’s benchmark Sensex has climbed more than 8% in the past two months.

Aggregate net profit growth of 124 BSE-listed companies that reported March quarter earnings fell 8.42% from a year earlier after adjusting for one-time gains or losses, according to data provider Capitaline. Profit grew 7.54% in the preceding three months.

Net sales growth slowed to 11.3%, a five-quarter low, from 15.7% in the preceding December quarter.

Operating profit margins, however, widened marginally to 21.88% during the quarter from 21.69% in the preceding quarter as companies cut costs. The earnings review excludes banks, financial services and oil and gas firms as these companies follow a different revenue model.

Lower sales have dragged profits down as operating leverage has also faded, according to Shiv Diwan, co-head of institutional equities at Edelweiss Securities Ltd. “It’s the combination of slowing global growth (hurting exports), tight liquidity (impacting consumer loans) and scale-back in government spending (affecting rural demand) that has hurt sales and thus profits," he said.

A closer look at the earnings of manufacturing companies reveals a challenging economic environment. Data showed that for the 91 manufacturing companies that have reported earnings, adjusted net profit slipped to at least a 13-quarter low, declining 38% from 10.9% in the December quarter. Adjusted net profit growth of services companies rose 21% from 5.88% in the preceding three months.

While software services and cement companies are relatively better off, the near-term outlook for automobile makers appears cloudy, according to Shibani Sircar Kurian, head of equity research at Kotak Mahindra Asset Management Co.

“In the IT (information technology) sector, growth numbers have been close to expectations and the commentary on deal wins still remains favourable," Kurian said. “Cement is another sector, which has also reported an improving trajectory on the back of better pricing and the impact of lower raw material costs flowing into profitability, even while volume growth has been stable. The only sore patch has been the automobile space, where there has been pressure both on growth and margins."

To be sure, only a few companies had reported results so far and extrapolating the current trends to the entire quarter could be misleading, Diwan said. “Nonetheless, the earnings so far have been a mixed bag. On the domestic front, while consumption has disappointed, with autos posting a weak set of numbers both on top line and margins, the results of cement companies have been encouraging. On the external front, IT companies posted another strong quarter on the top-line front, but continued to disappoint on margins, while guidance has also been a tad disappointing. Metal companies reported their first contraction in profits in the last three years," he said.

Still, analysts say that early indicators suggest significant softening of consumer demand, which may dampen overall sentiment. Rural consumption suffered in the past few years because of several disruptive changes in the economy such as demonetization and implementation of the goods and services tax, apart from two consecutive droughts in 2014 and 2015. “The slowdown is more pronounced in leveraged consumption such as autos, as they have been impacted by the liquidity tightness post the IL&FS crisis," Diwan said. “With regard to rural consumption such as staples, some companies have highlighted slowdown, but this could be more temporary in nature, as the central government has scaled back rural spending in the second half of FY19. We think this should improve post elections and we would be less concerned on this front."

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