Photo: Mint
Photo: Mint

Earnings of Indian firms decline for the first time in six quarters

  • Net sales grew 8.24%, a five quarter low, in the March quarter, slower than the 13.45% in Q3 of last fiscal
  • Demand has weakened due to the liquidity crisis, rural distress and a global slowdown

Earnings of Indian companies fell for the first time in six quarters in the three months ended 31 March, underscoring subdued private consumption as households face an uncertain economic outlook.

A Mint analysis of 1,619 listed companies showed that aggregate profit growth, after adjusting for one-time gains or losses, declined 0.7% in the March quarter from a year earlier. Profit for the same set of companies grew at 7.61% in the preceding quarter.

Net sales grew 8.24%, a five quarter low, in the March quarter, slower than the 13.45% growth reported in the preceding three months, according to data provider Capitaline. Operating profit margin narrowed to 15.92% during the quarter from 16.11% in the preceding three months. The earnings review excludes banks, financial services and oil and gas firms as they follow a different revenue model.

India’s gross domestic product (GDP) growth rate in the March quarter also slowed to 5.8%, the slowest in nearly five years. GDP growth during 2018-19 fiscal stood at 6.8%, slower than the 7.2% in the previous financial year.

“Growth has slowed down in the March quarter, especially for consumer facing businesses," said Chandraprakash Padiyar, senior fund manager, Tata Mutual Fund.

Vinod Karki, vice-president (strategy), ICICI Securities Ltd said that high-frequency data suggests that aggregate demand is weakening for reasons such as the liquidity crisis, rural distress and a global slowdown. Rural consumption suffered in the past few years because of several disruptive changes in the economy, including demonetization and implementation of the goods and services tax, apart from back-to-back droughts in 2014 and 2015.

“The revenue growth during the quarter was supported by the cement sector and IT sector. Some companies in non-BFSI (banking, financial services and insurance) reported lower profitability on account of margin pressure given higher costs, delay in price hikes given sluggish demand and slower-than-expected growth in revenue," Centrum Broking Ltd said in a report on 31 May. Weak volume growth reported by consumer staple companies in the fiscal-fourth quarter underlines a slowdown, said Kotak Institutional Equities. “When a generally measured management like Hindustan Unilever’s uses the term ‘recession’ in its comments in the post-results presser, it generally isn’t a one-quarter blip," it said in a note on 4 May.

A close observation of Q4 earnings also shows that interest paid by companies on their debt rose to 18.95% from 12.85% in December quarter. The interest coverage ratio (ICR) of these companies declined further in the fourth quarter compared to previous quarter. ICR, which measures the ability of businesses to service their interest costs, stood at 3.08 times, falling from 3.12 times in the previous quarter, data showed.

A low ratio means that a company is less capable of meeting its interest obligations from operating earnings.

Analysts said that it will take time for the government to revive economic growth and that an earnings revival will have to wait until then. A combination of monetary stimulus and structural reforms may help revive growth, they said.

“Liquidity crunch may be alleviated to some extent as cash in circulation growth is likely to moderate and government’s expenditures may increase going ahead as general elections related effects fade. Post election verdict, net foreign portfolio flow is expected to stay, which will add to rupee liquidity in the system," Karki said.

He does not expect private investments-driven earnings revival in the near-term as reforms will take time to uplift business and boost growth of companies going forward.

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