Early Q3 earnings hint at revival in growth, demand
BOUNCING BACK Growth in adjusted net profit of 103 firms hits 13quarter high
MUMBAI: Early trends in December quarter corporate earnings indicate a revival in business growth following a downturn in the aftermath of the November 2016 invalidation of high-value banknotes and the July 2017 implementation of the goods and services tax (GST).
A review of earnings reported so far suggests the return of demand although it is too early to conclude if disruptions from the implementation of the GST have fully faded.
According to data provider Capitaline, growth in net profit after adjustment for one-time items of 103 Bse-listed firms which have reported earnings so far jumped to a 13-quarter high, rising 23.02% year-on-year in the December quarter of fiscal 2018, against 4.92% in the preceding three months.
Operating profit margins of these firms, however, were flat at 29.97% during the quarter, against 29.86% in the preceding quarter. Raw materials cost for the same set of firms rose 12.5% in the December quarter compared to the preceding quarter as Brent crude prices rose 16.21% during October-december.
The earnings review excludes banks, financial services companies and oil and gas companies.
There were expectations that the earnings recovery will gain momentum during the quarter due to last year’s low base caused by demonetisation and the fading impact of Gst-led disruptions.
Teena Virmani, vice-president (research), Kotak Securities Ltd, said earnings so far have been better than estimates, led 80 60 40 20 0 -20 -40 Q4 FY14 Q3 FY18 Q4 FY14 Data excludes banks, financial services firms and oil and gas firms. by demand improvement and the benefit of last year’s low base. “Post the GST rate changes incorporated in the month of November, demand started witnessing improvement in double digits in most consumer-related segment. Also, sequentially, the results in Q2FY18 were impacted by monsoon as well as GST implementation. The recovery in demand has been witnessed post Q2FY18 contributing to earnings in Q3, though prices have declined sequentially due to GST rate changes,” she added.
Pankaj Pandey, head of research at ICICI Securities Ltd, said the effects of demonetisation are fading. Businesses are not feeling the impact of it anymore and the transition to the new indirect tax system under the goods and services tax is almost over.
“Earnings have been more or less in line with expectations. We were expecting double digit growth for domestic-oriented sectors. There is a consumer demand pick-up which led to it. Commercial vehicles sales data is a good economic lead indicator and data for last month suggest an increase in consumer demand,” he added.
Rural consumption suffered in the last two years due to several disruptive changes in the economy, such as demonetisation and GST, apart from two consecutive droughts in 2014 and 2015.
Analysts say that two consecutive years of good monsoon rainfall (2016 and 2017), farm loan waivers, a recovery in real rural wage growth and post-gst supply chain normalisation will drive rural consumption now.
“We believe that the government would allocate higher spend for rural and agriculture segments ahead of 2019 general elections. The Q2FY18 commentary, as well as our recent interaction with companies in the FMCG (fast-moving consumer goods), auto, durables and NBFC (non-banking financial company) sectors in November and December 2017, confirms the bottoming out of rural consumption,” wrote Motilal Oswal Securities Ltd in a note.
The brokerage expects consumption recovery to gather steam in calendar 2018. Firms in consumption-oriented sectors will see earnings pick up strongly in the second half of 2017-18 and beyond. NEWDELHI: State-owned explorer Oil and Natural Gas Corp. (ONGC) is looking at raising debt and selling some of its shareholding in other public sector companies to finance its ₹36,915 crore acquisition of a 51.11% stake in state-owned refiner Hindustan Petroleum Corp. Ltd. (HPCL).
ONGC chairman and managing director Shashi Shanker said the company will decide the most economical way of fund raising to conclude the deal by the end of January.
“We have cash balance with us. We have some liquid assets also (cross-holding in other state-owned companies). That is worth about ₹25,000-30,000 crore. Simultaneously, what we have done is that we have tied up short-term borrowing at a very competitive rate. When we have to make the payment (for the acquisition), we will look at all these options and whichever is the most economical for us, we will exercise that,” said Shashi Shanker.
ONGC has a cash balance of about ₹13,000 crore and holds a 13.77% stake in Indian Oil Corp. Ltd (IOCL) and 4.86% in GAIL India Ltd.
Shanker said that since the company wanted more flexibility in its funding options, it has raised borrowing li mits to ₹35,000 crore from the ₹25,000 crore decided earlier.
He also ruled out fire sale of any liquid assets to finance the transaction.
After concluding the deal, ONGC will retain HPCL’S identity but explore synergies between the refiner and ONGC’S subsidiary Mangalore Refinery and Petrochemicals Ltd (MRPL).
ONGC’S acquisition of HPCL, announced on Saturday, is exempt from a public offer as both entities are related parties.