Turnaround stories bump up corporate profits

Corporate India’s earnings scorecard in the fourth quarter of 2016-17 was greatly influenced by companies that reported a turnaround from loss to profit. The combined net profit of 863 companies that have declared their fourth-quarter results so far tripled during the January-March period (up 217 per cent) over the corresponding quarter a year ago.

Adjusted for loss-making companies, however, the net profit was up 18.5 per cent year-on-year (y-o-y) during the fourth quarter, against 3.2 per cent growth during the corresponding quarter of 2015-16 and 17 per cent y-o-y growth during the third quarter.

The bump in growth is largely due to a turnaround in the profitability of Vedanta, and public sector banks such as Punjab National Bank, Canara Bank, and Bank of Baroda. All three banks had reported record losses during the fourth quarter of FY16. Tata Steel, too, reduced its loss.

The analysis is based on the quarterly results of 863 companies whose comparable numbers are available for the last 16 quarters.

In the last four years, nearly a fifth of all the listed companies, on average, reported losses (on a net basis) in at least one quarter. For example, 169 companies, or 19.6 per cent of the sample, reported a net loss during the January-March 2017 quarter. The number was 201, or 23.3 per cent of the sample, during the corresponding quarter a year ago and 166 companies (19.2 per cent) in the December 2016 quarter.

Excluding loss-making companies, the net profit growth has been steady at around eight per cent on an annualised basis in the last three financial years.

In the March 2016 quarter, nearly a fourth of the sample companies reported a combined net loss of around ~52,000 crore led by metal producer Vedanta and public sector banks, which were going through the central bank’s asset quality review. The combined net profit of the companies in the sample declined by 45 per cent y-o-y to ~22,469 crore in that period.

Vedanta reported a record loss of ~21,103 crore during the March 2016 quarter, while 11 public sector banks together reported a net loss of ~21,267 crore. >

Tata Steel was another major lossmaking firm in the last financial year. After peaking in March 2016, losses are now on a downward trajectory with loss-making companies together reporting combined net loss of ~16,971 crore during the March 2017 quarter. The improvement was due to a turnaround in the profitability of Vedanta, Tata Steel and Punjab National Bank. Analysts attribute it to a global turnaround in commodities and energy prices aiding the profitability of domestic metal, mining and oil and gas companies in India. They also see a cyclical upturn in corporate earnings in the near to midterm. “There could be a cyclical upturn in corporate earnings over the next few quarters, driven by commodity and energy producers and some amount of fiscal stimulus by the government in FY18, which will benefit consumer demand oriented companies,” says Dhananjay Sinha, head of research, Emkay Global Financial Services.