Los­ing fizz

Q2 earn­ings have raised doubts about whether In­dia Inc can get to dou­ble-digit profit growth

The Hindu Business Line - - THINK -

The Sen­sex’ 246-point gain in the sym­bolic Muhu­rat trad­ing ses­sion seems to have buoyed mar­ket par­tic­i­pants’ hopes that In­dia’s five-year old bull mar­ket will re­sume in Sam­vat 2075, fight­ing off the bear at­tacks of the past year. But stock prices re­spond to earn­ings, not sen­ti­ment. On this count, the lat­est quar­ter earn­ings scorecard from In­dia Inc points to a cloudy out­look for stocks, with profit dis­ap­point­ments threat­en­ing In­dia Inc’s re­turn to dou­ble-digit profit growth. A Busi­nessLine anal­y­sis of 939 com­pa­nies that de­clared their July-Septem­ber 2018 re­sults found that, de­spite a notable ac­cel­er­a­tion in rev­enue growth to 21 per cent, th­ese com­pa­nies man­aged muted op­er­at­ing profit and net profit growth at 7.2 per cent and 3.3 per cent, re­spec­tively. The num­bers de­clined se­quen­tially from 12 per cent plus in the June quar­ter.

Three trends scut­tled a broad-based earn­ings re­cov­ery. One, though most sec­tors showed signs of de­mand pick-up, the sharp spike in raw ma­te­rial costs pre­vented this from trick­ling down to cor­po­rate prof­its. Man­u­fac­tur­ing firms saw their ma­te­rial costs to sales spik­ing by a hefty four per­cent­age points in the last one year, thanks to spi­ralling global oil and metal prices, a weak­en­ing ru­pee and ris­ing tar­iffs. Com­pa­nies were quite un­able to pass this on in full to their end-users and took a sig­nif­i­cant hit on op­er­at­ing profit mar­gins from 17.1 per cent to 14.8 per cent. While there has been re­lief on both oil prices and the ru­pee lately, mar­gin re­cov­ery will de­pend on th­ese trends sus­tain­ing. Two, de­spite good loan off­take, banks con­tin­ued to strug­gle un­der the twin bur­dens of bad loan pro­vi­sion­ing and higher fund­ing costs. While pri­vate lenders man­aged to sta­bilise prof­its, pub­lic sec­tor banks (PSBs) took a bat­ter­ing. The profit out­look for PSBs is now highly re­liant on ad­di­tional cap­i­tal in­fu­sion from a fis­cally-con­strained Cen­tre. Three, fast-grow­ing ser­vice sec­tors such as air­lines and tele­com wal­lowed in red ink as com­pet­i­tive pres­sures hurt their tar­iffs, even as costs spi­ralled.

That said, the bright spots came from FMCG firms which clocked strong vol­umes, metal firms which ce­mented mar­gin gains and turnkey in­fra firms with very strong or­der flows. Pharma and IT firms also de­liv­ered profit sur­prises af­ter deal wins and a ru­pee boost. The Nifty50 and Sen­sex30 con­stituents re­ported al­most twice the profit growth of the broader uni­verse, helped by the global leg to their op­er­a­tions. But with their profit growth still in sin­gle-dig­its, an­a­lysts are al­ready re­vis­it­ing their wildly op­ti­mistic con­sen­sus pro­jec­tions of 18-20 per cent growth for FY19. The fear of In­dia Inc miss­ing their profit es­ti­mates for the eleventh con­sec­u­tive year is now loom­ing large over stock val­u­a­tions. Given that liq­uid­ity fac­tors for the mar­ket with up­com­ing elec­tions and skit­tish for­eign in­vestors are not sup­port­ive ei­ther, it will need more than a good Muhu­rat ses­sion to put the an­i­mal spir­its back into In­dian eq­ui­ties.

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