Turnaround time
Early trends in corporate earnings hold out hope
The third-quarter results of 284 listed companies offer an encouraging snapshot of corporate performance. The recovery continues to gain strength and more sectors appear to be participating. However, corporate demand still seems patchy and the trends are nascent. Compared to the corresponding period of October-december 2019, net sales have remained flat for this sample but operating profits (PBDIT) have risen 33 per cent on the back of lower interest costs and raw material expenses. Profit before tax (PBT) has risen 88 per cent and profit after tax (PAT) 93 per cent. However, if volatile sectors such as banks, non-banking financial companies, and refineries are excluded from the sample, net sales have risen 9.8 per cent for the rest of the companies; operating profit margins have remained almost the same, while PAT and PBT have gone up 51.5 per cent and 50.1 per cent, respectively. That’s still quite encouraging, even discounting the low base effect.
In general, it is prudent to exclude banks since profits can be volatile. This is especially true for the sample of 13 banks — while Axis Bank has seen a drop in PAT, YES Bank and UCO Bank have recovered from a period of excessive losses in 2019-20. YES Bank has reported a profit of ~147 crore this quarter, in contrast to a loss of ~18,564 crore a year ago, and UCO has reported PAT of ~35 crore versus a loss of ~960 crore. Moreover, banks have benefited from easier bad loan reporting norms and credit growth at 7.8 per cent remains low. There has been a generic recovery across the auto-ancillaries sector, and Bajaj Auto, which is the only auto major to have declared results so far, has also delivered a 29 per cent PAT gain. Capital goods have seen a 34 per cent rise in sales, which hold out hope. Textiles, which have significant employment generation capacity, have also seen a 12 per cent rise in sales and over a 200 per cent rise in PAT for a sample of 14 companies.
The IT sector continues to show a steady performance, with a 6.9 per cent rise in sales and a 17 per cent rise in PAT for 26 listed companies, including most of the big guns. The pharma industry has seen sales expand by 12 per cent and PAT by 18.5 per cent but none of the bigger firms has reported their results yet. In fast-moving consumer goods (FMCG), Hindustan Unilever and Marico are the only large companies to have declared results so far. The former has seen PAT going up by a decent 19 per cent and sales (20 per cent growth). Cement, steel, and non-ferrous metals have all shown excellent results. The five cement companies that have declared results so far have seen a 15.9 per cent expansion in sales and a 130 per cent rise in profits. The steel sector (16 companies) has seen a smart turnaround with profit climbing to almost ~7,000 crore from losses of ~533 crore a year ago, while sales have risen by 22 per cent. Nonferrous metals producers have seen a 25.5 per cent expansion in sales and a 34.7 per cent jump in PAT. There are of course a few worrying signals. The first is a sharp increase in other income of over 23.6 per cent, which may not be sustainable. Another red flag is the change in the commodity cycle — this is in response to global trends and it may impact downstream sectors. Overall these are still early days and, typically, companies with weak performance tend to declare their results towards the end of the earnings season. Nevertheless, the early trends signal a turnaround by corporate India.