Home >Markets >Commodities >Rising crude prices crimp profit growth in Q3, early trends show

Early fiscal-third quarter earnings indicate that profit growth of Indian companies has slowed because of rising crude oil prices.

Although commodity prices softened and the rupee strengthened in the December quarter, analysts said the full impact of lower prices may be visible only in the quarter ending 31 March.

Earnings of 90 BSE-listed companies showed that aggregate net profit, after adjusting for one-time gains and losses, grew 7.38% in the December quarter from a year earlier, slower than the 10.1% growth in the preceding three months.

December quarter net sales growth, however, rose to at least an 11-quarter high of 18.76% from 18.57% in the September quarter.

In the three-month period ended December, both operating profit margin and net profit margin of these companies widened to 26.3% and 17.41% from 25.95% and 17.03% respectively in the previous quarter.

This sample excludes banks, financial services firms and oil and gas companies.

“By far earnings have been slightly better than market expectations. Hence we are seeing stock prices reacting positively to the results. Largecap and top blue chip companies have delivered decent third-quarter numbers whereas midcaps have been fairly okay given the valuations," said Jinesh Gopani, head of equities at Axis Asset Management Co. Ltd.

He said there was some pressure on margins in the third quarter due to higher raw material costs.

“That could be one reason why profit growth is not in sync with sales in the quarter," he added.

In the three months ended December, Brent crude prices fell 35% after a rise of 4.13% in the previous quarter. Similarly, the rupee also strengthened 3.9% in the December quarter following a fall of 5.55% in the July-September period. High crude prices typically hurt profit margins of companies like those in the paint and aviation sectors.

There is a lag impact of lower crude prices which will be felt only in the next quarter as buying patterns of companies are different, according to Pankaj Pandey, head of research at ICICI Securities Ltd.

He said the earnings reported so far are in line with expectations.

“Overall, headline numbers were expected to be weak. For companies under our coverage, we were expecting top line growth of 12% and bottom line growth of 3% largely because of two sectors—telecom and downstream companies in the oil and gas pack. If I exclude them, both top line and bottom line are expected to see double digit growth in the third quarter."

Graphic by Vipul Sharma/Mint
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Graphic by Vipul Sharma/Mint

Pandey expects a revival in earnings growth in FY20, led by banks. “Higher provisioning made by banks in earlier quarters and debt resolution will result in better earnings growth in the next fiscal," he added.

Overall revenue growth is expected to be constrained by a demand slowdown in automobiles, sugar, aluminium and telecom services.

Automobiles revenue is expected to have been impacted by a rise in ownership costs, while other sectors would bear the impact of lower realisations and competitive pressures.

Rahul Prithiani, director of Crisil Research, said limited ability to pass through increased input prices to customers in sectors such as airlines, cement, retail and telecom, due to competitive pressures and high sensitivity to price movements, will accentuate pressure on margins in the third quarter.

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