BackComplete washout in March qtr reiterates earnings revival will be a long wait
As demand remained weak, net sales and profit, adjusted for one-time profit or loss, slumped to 20-quarter low for the three months ended 31 March from a year earlier, showed a Mint analysis of 1,536 listed companies
PremiumCorporate earnings for March quarter reiterated the fear that nationwide lockdown in March-end worsened growth prospects and that the much-awaited revival of earnings will take longer. Due to uncertainty related to complete resumption of business activities, companies did not provide earnings guidance to investors while management commentaries indicated aggressive cost cutting measures and delay in capex.
As demand remained weak, net sales and profit, adjusted for one-time profit or loss, slumped to 20-quarter low for the three months ended 31 March from a year earlier, showed a Mint analysis of 1,536 listed companies. Decline in raw materials cost and lower tax outgo for these companies, which excludes banks, financials and oil & gas, could not help in supporting earnings growth.
In March quarter, net sales fell 8.84% (year-on-year), a 20-quarter low, compared to 15.31% growth in the fourth quarter of FY19, according to data provided by Capitaline.
Similarly, adjusted net profit declined 33.58% (YoY) in the January to March period, from a marginal growth of 0.34% in the same quarter the previous year.
"The results remained weak. Topline growth for our coverage universe contracted by 5% YoY, with almost 60% of companies posting a topline contraction. While the two week lockdown, did exaggerate the weakness, one should keep in mind that growth was weak even pre-covid. Even in last quarter we had one of the broadest topline contraction," Shiv Sehgal, President and co- Head, Institutional Clients Group, Edelweiss Securities Ltd said.
According to Sehgal, cement posted a positive surprise with companies reporting a multi year high EBITDA/ton and showed strong profit growth. This was largely due to lower input prices and strong price discipline of cement companies.
However, despite gains on input prices manufacturing companies are facing the heat owing to low demand which leads to lower capacity utilizations.
During the March quarter, raw material costs for these companies under review were down 14.30% compared to an increase of 15.45% in Q4 of previous fiscal. Crude prices were down 65.55% and Bloomberg commodity index (which represents over 20 commodities) was down 23.53% in January to March this year.
"Decline in sales impacted the overall operating leverage of the manufacturing space despite savings in raw material costs. Consequently, there was a dip in operating margins as well as overall profitability,"Pankaj Pandey, Head – Research, ICICI Direct said.
However, Pandey feels that management commentary along with Q4FY20 results of FMCG companies was a positive surprise as most of them saw robust demand prospects as well as double digit volume growth post restoration of supply chain in the categories like processed food (biscuits, flour), hygiene products (soaps, sanitizers) as well as immunity boosters for the month of April-May 2020.
Among 1072 companies in the manufacturing segment, net sales declined multi-year low to 13.49% (YoY) and adjusted net profit plunged to 43.36% in the March quarter. Net sales of these companies saw a growth of 15.65% while adjusted net profit was down 8.30% in March quarter of FY19.
In contrast, net sales of 464 services companies was at 4.70% in March quarter from a growth of 14.34% in same quarter previous fiscal. Adjusted net profit of these companies were down 14.48% in Q4FY20 against a growth of 22.94% in Q4FY19.
With the number of covid-19 cases still rising, earnings revival will take longer said analysts.
“Certainly, the June quarter is expected to be further muted given the large part of it was under lockdown/restricted economic activity scenario. The demand recovery in the broader economy domestically is expected to be gradual or “U" shaped in nature vs. earlier anticipation of “V" shaped recovery," said Pandey.
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