Third-quarter earnings off to a good start

Combined net profit of 130 firms up 16.5%, thanks to RIL, Infy, and Jaiprakash Associates

The third-quarter (Q3) earnings season has started on a positive note for Corporate India, with the combined net profit of 130 early bird companies up 16.5 per cent on a year-on-year (YoY) basis, growing at the fastest pace in the last seven quarters.

Combined net sales were up 12.6 per cent YoY during the October-December 2017 quarter, growing at the fastest pace in the last three quarters.

Earnings growth is polarised with five companies — Reliance Industries (RIL), Infosys, Jaiprakash Associates, HDFC Bank, and ITC — accounting for nearly 85 per cent of incremental growth in net profit during the quarter. Three of these companies got a boost from one-time gains in income or expenses rather than organic growth in their businesses. RIL and HDFC Bank, however, reported double-digit growth in earnings, driven by growth in their businesses. RIL accounted for 30 per cent of incremental growth in net profit during the quarter, thanks to a good showing by its petrochemicals and telecom divisions. Infosys’ profits were boosted by a 90 per cent dip in its tax outgo, as the company reversed income tax expense provisions of ~14.32 billion after an agreement with the US tax department. ITC’s bottom line was also boosted by tax-reversal of ~4.12 billion, accounting for the bulk of the growth in its earnings during the quarter. Jaiprakash Associates reported a sharp fall in its quarterly loss, driven by lower interest expenses after asset sales.

The headline number is in line with the Street expectations of 15.4 per cent YoY growth in the net profit of Nifty50 companies during the quarter. Revenue growth is lower than what analysts had anticipated (15.3 per cent) at the beginning of the quarter. Net profit growth fell short of expectations, if adjusted for exceptional gains booked by some of the top companies in the quarter. The early bird sample has 16 firms, which are part of the Nifty50 index.

At the sectoral level, private sector lenders and fast-moving consumer goods companies led the growth charts.

While private banks gained from a strong growth in retail lending, consumer companies witnessed a revival demand after the disruption caused by demonetisation in FY17 and the implementation of the goods and services tax during the first half of the current fiscal year. Base effect is also in play here as consumer demand was adversely affected during Q3 of the last fiscal year due to note ban.

While the revenue and net profit numbers look good, the impact of higher commodity and energy prices for manufacturing companies is evident as they reported a sharp rise in raw materials and energy expenses during the quarter. The combined raw material costs for companies, excluding energy, financials, and information technology, was up 22 per cent during the quarter, against just 6.2 per cent growth in net sales during the period. Power and fuel expenses were up 11.4 per cent during the quarter.

As a result, the lower operating margins of manufacturing companies have impacted overall margins. The core operating (excluding other income) was down 140 basis points on sequential basis to 25.7 per cent during the quarter. Analysts expect a further rise in input cost and decline in operating margin in the forthcoming quarters. “Margins are likely to remain under pressure for some time as commodity and energy prices remain elevated. This will make its tough for companies to sustain faster earnings growth unless volume growth picks up fast,” says Dhananjay Sinha, head of research, Emkay Global Financial Services.