Home >Companies >News >Lower taxes boost results in Q2, but earnings revival is far away

Earnings for the latest quarter have ushered mixed news for the corporate sector. While the recent cut in corporate tax rates led to better-than-expected profit and restrained the pace of earnings downgrades, businesses continued to reel under pressure in the three months ended September.

Lower commodity prices and cost cutting initiatives by companies aided in aggregate net profit growth, but lower revenue in the second quarter underscored continued sluggish demand.

A Mint analysis of 1,462 firms showed net sales in the September quarter was the lowest in at least 27 quarters. Net sales decelerated 2.23% year-on-year, much lower than the 5.15% growth in the preceding three months, according to data provider Capitaline. This compares to net sales growth of 21.61% in Q2 FY19. In Q2, profit before tax (PBT) was also lowest in three quarters, with companies surveyed reporting a fall of 7.92% y-o-y compared with a 1.58% drop in Q1 FY20.

In the second quarter of FY19, profit before tax had grown by 16.92%. As reduction in corporate tax rate cuts resulted in several adjustments in last quarter’s tax numbers, we have assumed PBT for our assessment.

Including telecom firms Bharti Airtel and Vodafone Idea, PBT of these companies fell 62% (y-o-y) in Q2FY20, while it had reported growth of 10.79% in Q2FY19. The two telcos incurred a record 50,922 crore loss and 23,045 crore loss, respectively, in the September quarter.

The difference between PBT and profit after tax (PAT) is exaggerated due to the deferred tax adjustments for the quarter. Tax reversals pertaining to higher taxes paid in Q1FY20 has also inflated Q2FY20 net profit. Adjusted net profit of these companies rose 8.76% y-o-y in Q2 compared with growth of 0.87% in Q1 FY20. The review excludes banks, financial services and oil and gas companies, which follow a different revenue model.

“The quarterly results show resilient double-digit growth in aggregate net profit aided by the recent corporate tax cut, lower commodity prices and cost-cutting initiatives. However, lacklustre revenue growth reveals lower demand both at the business and consumer levels. Destocking across the board also contributed to sluggish topline growth. Lower commodity prices resulted in lower topline growth for a whole host of firms , including metals," said Deepak Jasani, head, retail research, HDFC Securities Ltd.

Prices of commodities, such as crude oil and metals, underwent a steep correction in the September quarter. Crude prices were down 8.67%, aluminium 4.40% and copper 4.79% lower on the London Metal Exchange in Q2.

Jasani said while some companies gained from providing lower amounts towards tax, some others had to write off the accumulated deferred tax asset to opt for the lower tax regime resulting in higher effective tax provision. He expected the effective tax rate to have fallen on an overall basis and which could decline further in the next fiscal.

Data showed that taxes paid by these companies fell 57% in Q2 to the lowest in at least 27 quarters. In the same quarter last fiscal, tax outgo was 32.84% higher.

Shibani Kurian, head, equity research, Kotak Mahindra Asset Management, said there was no major disappointment in Q2 earnings overall.

“Earnings were mostly in line with expectations. Management commentaries indicate that they are not confident of the continuation of the minor revival growth seen due to festival demand," she said. “Number of companies saw good net profit growth due to cut in corporate taxes leading to no further earnings downgrade, which was earlier expected. Companies were able to maintain margins due to low commodity prices, but we will watch how it pans out going forward."

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