Net profit growth enters positive zone in Jul-Sep2 min read . Updated: 16 Nov 2020, 06:12 AM IST
- Firms post better sales, profits on cost cuts, sharp recovery in demand
Adjusted net profit growth turned positive in July-September after a year-long slump as consumers shrugged off the pandemic to deliver a surprise rebound in consumption while cost-saving measures continued to keep expenses under control.
A Mint analysis of 1,774 publicly traded companies that have reported their fiscal second-quarter earnings showed that net profit after adjusting for one-time items grew 1.42% from a year earlier, according to data compiled by Capitaline. That compares to a 67.3% plunge in the preceding three months. Profit grew 10.8% in the September quarter of last fiscal. The review excludes banks, financial services, oil and gas companies as they follow a different revenue model.
Net sales of the companies surveyed, although still in the negative territory, have also improved substantially in the September quarter from the preceding three months. Revenue fell by 0.75% in the second quarter from a 28.3% drop in the prior quarter. It fell by 2.49% in the September quarter of the previous financial year.
A raft of recent economic indicators—from factory output to tax collections to fuel demand—indicate that earnings recovery may well continue into the third quarter after a strict lockdown in the June quarter paralyzed business.
The September quarter (Q2) results were overwhelmingly better than expectations, perhaps because expectations were set too low, said Nirav Sheth, chief executive of institutional equities, Emkay Global Financial Services. “Besides costs declining dramatically, operating margins expanded and there was also an improvement in cash flows and a near collapse in capex. Construction, industrials and some obvious ones like airlines and restaurants, however, lagged behind," Sheth added.
Pent-up demand because of the shutdown in the fiscal first-quarter lifted sales significantly, aiding earnings recovery, investors said.
“There were broadly three trends in this result season: spillover of demand from Q1 to Q2 as well as restocking the pipeline in anticipation of festive sales; massive share gains from the unorganized sector; and, lastly, significant cost control exhibited by most listed firms. These together led to strong earnings prints and, after a long time, we have seen the Street upgrading earnings estimates," said Harish Krishnan, fund manager (equity), Kotak Mahindra Asset Management Co.
Cost reduction steps such as low staff costs, a sharp drop in travel expenses and cuts in ads continued to boost margins in the September quarter. Crude prices, one of the key components of raw materials, dropped 17% in July-September and helped in margin expansion.
The net profit margin of these firms expanded to 8.78% in the three months to September from 1.26% in the preceding quarter and 5.63% a year ago. Similarly, operating profit margin widened to 22.95% in the September quarter from 18.73% in the preceding three months and 17.25% in the September quarter of past fiscal.
However, Krishnan expects margins to narrow as ads and salary cuts are restored. “The last variable that will influence is sentiment, especially as a medical solution for covid-19 gets announced, and consumers get back to their pre-covid habits. We think there may be continued gains in sectors that have large unorganized players, as these companies will continue to be impacted by supply-side issues of access to capital and labour," he said.