Early birds get a boost from RIL

COMBINED NET PROFIT UP 10.6% YoY IN JUNE QUARTER EXCLUDING RIL, METALS AND FINANCIALS, PROFIT DOWN 5.3%

The corporate results season for the April-June 2017 quarter has started on an encouraging note, thanks to a better-than-expected performance by industry heavyweights such as Reliance Industries (RIL) and Hindustan Zinc.

The combined net profit of 119 early bird companies is up 10.6 per cent on a year-on-year (YoY) basis in the first quarter of FY2017-18 (FY18), better than the 10.2 per cent growth reported by the sample in the corresponding year-ago period. However, it’s a sharp deceleration from the 33.3 per cent YoY growth in earnings during the March 2017 quarter. Earlier, brokerages were expecting the combined net profit of Nifty50 companies’ to decline by 2.6 per cent during the quarter. The current sample has 10 index companies.

The sample’s combined net sales were up 14.8 per cent, a sharp turnaround from a marginal 0.5 per cent YoY decline a year ago, but down from the 20.6 per cent YoY growth recorded during the fourth quarter (Q4) of FY2016-17 (FY17). The final numbers could still change, as many industry leaders and index bigwigs such as ITC, Tata Motors, HDFC Bank, HDFC, State Bank of India, Tata Steel, Maruti Suzuki, Coal India, NTPC, and Larsen & Toubro are yet to declare their results for the June quarter.

A good show by early birds has been greatly influenced by strong earnings growth reported by RIL and cyclicals such as private sector banks and metal producers like Hindustan Zinc. Excluding cyclicals, net profit declined over last year’s period, while net sales growth decelerated as expected by the Street.

RIL’s net profit was up 28.3 per cent YoY during the June quarter - its best in the last six quarters - led by higher profitability at its petrochemicals and refining divisions and 36 per cent YoY jump in other income. Net sales were up 28.4 per cent YoY, against 15 per cent decline in the year-ago period and 42 per cent YoY growth in the preceding quarter. The company accounted for 27 per cent of the combined net profit of all early bird companies in the June quarter. Its revenue share during the quarter was 36 per cent.

The combined net profit of 83 companies, excluding RIL, banks & financials, and metal companies, was down 5.3 per cent during the quarter - the first decline in earnings in the last 10 quarters for the sample. In comparison, net profit was up 11.9 per cent in the corresponding year-ago quarter and by 1.5 per cent for the March 2017 quarter.

Net sales were up 4.8 per cent, against seven per cent YoY growth during the corresponding period a year ago and 8.1 per cent increase during Q4 of FY17. Poor volume growth and rise in raw material costs led to a decline in operating profit margins, thereby hitting the bottom line.

Analysts attribute the slowdown to domestic factors such destocking by manufacturers in the run-up to the roll-out of the goods and services tax (GST) beginning July 1, and appreciation in the rupee hitting exporters. “Poor corporate earnings in the first quarter are likely to break the positive trend observed in the past few quarters. Deceleration comes in the backdrop of better global trade data, implying that domestic factors are at play,” says Dhananjay Sinha, head institutional research, economist& strategist at Emkay Global Financial Services.

Core operating profit margin, excluding gains from other income, was down 183 basis points (bps) on a YoY basis and 50 bps on a quarter-on-quarter basis. One bps is one-hundredth of a per cent.

The numbers for the sample (ex-Reliance, financials & metals) have been greatly influenced by information technology (IT) companies, which reported one their worst quarters in over two years. The combined net profit for IT services exporters such as Tata Consultancy Services, Infosys, Wipro and Mindtree was down 2.3 per cent on a YoY basis, while revenue growth at 1.2 per cent YoY was the lowest in last three years.

The IT industry’s core operating profit margin (excluding other income) was down 90 bps YoY and 140 bps on a sequential basis to the lowest level in at least four years to 23.2 per cent (of net sales) in April-June 2017 quarter.

Together, the IT companies accounted for 36 per cent of the combined net profit (~33,241 crore) of all early bird companies and 70 per cent of the combined net profit of companies ex-Reliance, financials & metal companies.