Home / Markets / Stock Markets /  Sluggish demand drags down earnings in Q1

MUMBAI : Earnings growth of Indian companies may remain muted because of sluggish demand and subdued private sector investments, according to the early trends of the June quarter financial results.

Aggregate net profit growth of 281 BSE-listed companies that have reported June quarter results showed that profit growth has slowed to 8.49% from 23.8% a year earlier after adjusting for one-time gains or losses, according to data provider Capitaline. The figure is, however, an improvement from the preceding quarter’s 5.67%.

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During the period, net sales growth slowed to an at least 13-quarter low of 5.07% from 20% in the same period last year and 10.27% in the preceding March quarter.

Operating profit margin, however, widened marginally to 22.49% in the June quarter from 20.74% in the preceding quarter. The earnings review excludes banks, financial services, and oil and gas firms as these companies follow a different revenue model.

Lower commodity prices in April-June helped keep profit growth intact to some extent as crude prices fell 2.7% and LME aluminium was 6% lower in the period. Raw material costs for the companies under review fell to at least a 13-quarter low. It declined 0.04% in the fiscal-first quarter compared to a 2.83% rise in the preceding March quarter. This is a sharp drop from 14.7% increase in last fiscal’s June quarter.

Commodity costs fell 60 basis points sequentially in the March quarter and a further 20bps in the June quarter, said Nomura. “Current prices are even lower and this was led by a correction in steel and aluminium prices…Moreover, lead prices also remained flattish in Q1 FY20 and are down sharply currently which should result in improved margins for battery companies going ahead," it said in a report on 9 July.

Pankaj Pandey, head of research at ICICI Securities Ltd, said declining commodity prices are hurting the metals sector while boosting margins for companies that use them as raw material.

“We were expecting a softer quarter for commodity-oriented sectors like metals due to lower commodity prices and inventory loss. This is exceptional for cement as earnings were largely driven by pricing. Overall sectors like pharma saw a broad base earnings recovery due to low base," Pandey said. As the consumption slowdown was already factored in the quarterly earnings, it is not very disappointing so far, he said.

While the decline in the stock markets can partly be attributed to proposals in the Union budget, analysts believe sustaining earnings momentum will be key. The progress of the monsoon, critical for the economy, has been rather slow. After the rainfall deficit for the four-month monsoon season touched 16%, the India Meteorological Department on Saturday forecast that the situation is likely to improve over the next week following active monsoon conditions across most parts of the country. “With almost six weeks going by since the monsoon began in June, the progress is a bit worrisome. While the deficit is being made up gradually, overall rainfall is still less than satisfactory. There is however scope for improvement during this month as well as August—as these are the two crucial months for agriculture," said CARE Ratings.

Analysts say factors such as lower interest rates and some budget announcements may boost growth in the coming quarters. The cost of capital has fallen led by repo rate cuts by Reserve Bank of India and general dovish commentaries by global central banks in this year. Also in the budget, the government has announced an initiative to tap overseas markets to meet part of its borrowing needs. “This should augur well for the interest rate and liquidity environment in India and also strengthen the currency," an analyst said.

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