Base effects dominate

Q2 corporate results aren’t as good as they look

Corporate India’s performance during the July-September 2018 quarter looks promising at first glance. The combined net profit of 1,889 companies grew 16 per cent year-on-year (YoY) and the combined revenues were up 19.6 per cent YoY, the best in at least three years. But the numbers look less impressive if base effects are considered. What also skewed the overall result is the strong performance of a few large corporates. The base effects were obvious. In the same period a year ago, net profits were down 11 per cent, due to teething troubles associated with the launch of the goods and services tax (GST). The combined revenues were also down 14.9 per cent YoY for this sample.

In Q2, 2018-19, nearly 60 per cent of the combined revenue growth was accounted for by oil and gas, and metals and mining. The net combined sales of energy companies, including Reliance Industries, were up 48 per cent YoY, while metals and mining companies' net sales were up 23 per cent. This performance was driven by the surge in global commodity prices across the energy and metals spaces. The metals and mining sectors also topped in terms of earnings growth with 151 per cent rise in the sector’s combined net profit, led by Coal India (which saw over 700 per cent growth in net profits) and Tata Steel, which reported over 90 per cent growth in operating profits. In contrast, cement, automobiles, auto ancillaries, consumer durables, airlines, and media & entertainment disappointed, with lower than expected growth. Earnings in domestic manufacturing were negatively affected by the inability to pass on higher input costs. Operating margins for domestic manufacturers were down 150 basis points on a YoY basis due to higher raw materials and energy costs. This is also reflected in the performance of the wholesale price index, which was consistently higher than the consumer price index during Q2, 2018-19, indicating that manufacturers lacked pricing power to pass on rising costs.

When it came to large firms, the BSE100 (top 100 companies listed on the BSE) showed sales grew 21 per cent YoY in Q2, 2018-19, the best since 2012. But if metals and energy are excluded, sales growth was only 10 per cent, which can again be explained away as a base effect. The operating profits grew 15 per cent YoY for the BSE100 but only by 13 per cent excluding energy and metals. As many as 37 listed companies in this sample saw operating profits decline. These results mirror that of the larger sample, suggesting that scale did not make much difference. Even among sectors that did see higher growth, non-banking financial companies (NBFCs) and consumer discretionary are very likely to see a slowdown. Consensus BSE100 estimates for the full fiscal year were cut by 4 per cent. The rollback in expectations came in with autos majors such as Tata Motors and Maruti being downgraded, and with weak performances expected from refiners and marketers. IT saw an upgrade due to a weaker rupee. The base effects are expected to continue because the second half of 2017-18 was also very weak. Hence, consensus expectations are that YoY growth would remain strong in the second half. But financial analysts expect that 2019-20 will see a slowdown as the base effects dissipate.