Lower input costs aid margins even as revenue falters, Q4 early trends show3 min read . Updated: 17 May 2020, 07:31 PM IST
- Although the lockdown was announced only during the last few days of the quarter, overall business sentiment had started to turn negative as the pandemic spread during the middle of the quarter
MUMBAI: The partial impact of nationwide lockdown in March quarter notwithstanding, early trends in corporate earnings show that business growth had already been impacted by the ongoing economic slowdown preceding covid-19. However, low raw material costs aided margins in some companies.
A Mint analysis showed that net sales of 105 BSE-listed companies, which have reported earnings so far, contracted by -0.82% in January-March period, a 21-quarter low. Net sales of these companies in March quarter last fiscal grew 14.74% while it was 5.12% in December quarter of FY20. Aggregate net profit growth of these companies was at -0.50% in Q4 from 7.02% in preceding quarter and -5.09% in March quarter last fiscal, according to data provider Capitaline. Net profit is adjusted against one time profit or loss and the earnings review excludes banks, financial services and oil and gas firms as these companies follow a different revenue model.
"It is important to note that the Indian economy was slowing considerably even before Covid-19, if we look at our systemic credit growth number. The last few days of March just added to the problem as a lot of push to achieve sales targets takes place during the fag end of the quarter," said Vinit Sambre, Head of Equities, DSP Mutual Fund. According to Sambre, earnings on the whole have disappointed.
Others concur. According to Mihir Vora, Director & Chief Investment Officer of Max Life Insurance, sales growth had been tepid even prior to the disruptions witnessed in the current quarter. Although the lockdown was announced only during the last few days of the quarter, overall business sentiment had started to turn negative as the global pandemic spread during the middle of the quarter.
“Further, globally linked sectors such as oil & gas, metals and many larger auto and auto ancillary companies saw larger impact as China and Asia had already started a sharp slowdown. Q4 earnings by large IT players were below expectations as transition to work-from-home had seen challenges on the supply as well as demand side as many clients could not give approval for work from home due to regulatory issues. Staples and pharmaceuticals have been relatively more stable," Vora said.
Many companies do a lot of inventory stocking of the distribution pipeline towards the end of the financial year – the transportation disruption came during the last two-three weeks of the financial year – hence the sales push could not be implemented. In the quarter, rural demand fared better than urban as there were better results from farm equipment, agriculture chemical and staples (food linked) than other sectors. However, analysts feel that reverse migration may impact this trend.
Despite the gloom, cheaper raw material costs helped companies manage costs and margins. Raw material like aluminum and copper were down 16-20% on the London Metal Exchange in March quarter. The Bloomberg Commodity index, which comprises 23 commodities across six sectors, was down 23.53% in March quarter. Operating profit margins widened marginally to 22.62% during the quarter from 21.09% in March quarter last fiscal as companies cut costs.
“Many of the companies were able to maintain margins (staples, cement and pharmaceuticals) due to either lower raw material costs or cutting on discretionary spends," said Vora.
As companies are staring at a bleak future, most management commentaries have withdrawn business guidance citing abnormal situation due to lockdown. Analysts said that cost over runs, peak season demand lost, higher fixed cost like interest cost, and shortage of contractual labor - the medium term impact of the migrant workers going home are likely crucial factors on which business recovery of these companies will hinge on.