Corporate India’s Q2 profit at 15-yr low on telco losses

COMBINED EARNINGS PLUNGE 68% YOY TO ~36,500 CRORE NET SALES DOWN 0.8% YOY — WORST SHOWING IN 3 YEARS

India’s listed companies, excluding financials and oil and gas, reported a combined net loss for the first time in at least 15 years, while their net sales contracted for the first time in four years in the July-september quarter (second quarter, or Q2).

While the bottom line slipped into the red due to record losses posted by mobile operators during the quarter, the decline in sales is attributed to demand contraction in the domestic economy. This, analysts say, also clouds the earnings outlook for the forthcoming quarters.

Listed companies, excluding financials and oil and gas (whose earnings are volatile), reported a combined net loss of ~16,000 crore in Q2 of 2019-20 (FY20), against a net profit of ~73,000 crore during the same period last year. This is the first time in many years where companies (excluding energy and financials) ended a quarter with a loss on a combined basis.

Their combined profit before tax (PBT) was also down 71 per cent year-on-year (YOY) to ~32,000 crore, against ~1.13 trillion a year ago, and a similar level of profit during the first quarter of the current financial year.

The combined net sales for companies, excluding financials and oil, were down 0.4 per cent YOY — their worst quarterly showing in at least three years. In comparison, their top line had grown by 13.1 per cent YOY a year ago and by 4.7 per cent YOY during the April-june 2019 quarter.

Excluding telecom, India Inc’s combined PBT was still down 11.3 per cent YOY to ~1.04 trillion, from ~1.18 trillion a year ago, indicating a weak economic environment. The combined net profit though was up 15.5 per cent YOY during Q2 to ~89,000 crore, but mainly due to the change in taxes.

The listed mobile operators, such as Bharti Airtel and Vodafone Idea, together reported a net loss of ~1.05 trillion during the quarter, compared to a net loss of ~4,100 crore a year ago. The industry has now been losing money for 11 consecutive quarters, beginning April-march 2017. In the last 33 months, the industry has cumulatively lost ~1.75 trillion, equivalent to nearly 50 per cent of its cumulative revenues in the period.

If the entire sample of 2,493 companies (including telcos, financials, and oil), whose numbers for Q2FY20 are available, is considered, India Inc reported a combined net profit of ~36,500 crore — the lowest quarterly figure in at least 15 years. The combined earnings were down 68 per cent YOY, from ~1.13 trillion a year ago. The sample companies’ combined PBT was down 35 per cent YOY to ~1.13 trillion, from ~1.74 trillion a year ago.

The contrasting growth in PBT and post-tax profit is attributed to a sharp jump in deferred taxes led by mobile operators.

The combined sales (net interest income in case of lenders) for these 2,493 companies were down 0.8 per cent YOY during the quarter — their worst showing in at least three years. In comparison, the top line had grown by 13.1 per cent YOY a year ago.

Excluding telecom, the combined profit of the sample companies was up 20.3 per cent YOY during Q2, driven by gains from a cut in corporate tax rates earlier this year and some help from lower input costs.

Excluding tax gains, PBT was up only 3.8 per cent YOY, growing at its slowest pace in the last three quarters.

Experts, however, are most worried about the contraction in companies’ net sales during the quarter. “Losses in telecom sector are exceptional in nature and could reverse, but contraction in corporate revenues is a bigger worry and is a negative operating leverage for companies. If it persists, corporate earnings could remain depressed for some time to come,” says Dhananjay Sinha, head research and strategy at IDFC Securities.

According to Sinha, earnings in many sectors were aided by lower commodity and energy prices, besides cut in corporate tax during the quarter that cushioned the blow. These one-off gains may dissipate in a few quarters unless there is pick-up in demand and volume growth.

Analysts say that unlike 2015 when a decline in revenues was largely restricted to oil and gas companies and metals producers, it is now widespread, with the exception of information technology (IT) services exporters and fast-moving consumer goods (FMCG) companies.

“In the past few years, the terms of trade had moved in favour of the corporate sector, in general, and the non-farm sector, in particular, due to lower commodity and food prices. This has begun to shift as indicated by the recent rise in food and farm produce prices. This could potentially hit corporate margins and urban demand, adversely affecting earnings in the forthcoming quarters,” added Sinha.

Other experts also sound cautionary.

“While the overall net profit growth (for our universe) was 10 per cent above our expectations, primarily due to the corporate tax rate cut and low raw material prices, sales continues to drag, due to widespread domestic and global slowdown,” said Pradeep Kumar Kesavan and Anushka Chhajed of Elara Securities in their Q2FY20 earnings review.

Banks and retail non-banking financial companies, including insurance companies, were the top performers during the quarter, with double-digit growth in net interest income and PBT. Their combined profit was higher by at least ~28,000 crore in Q2, compared to the year-ago period.

FMCG companies, such as Hindustan Unilever and Nestlé, and IT services exporters, such as Tata Consultancy Services and Infosys, reported between 5 per cent and 8 per cent YOY growth in net sales, but PBT underperformed, with 2-4 per cent YOY growth due to poor pricing power in the face of global demand slowdown.

In comparison, oil and gas, metals and mining companies, and automakers reported a contraction in the top line and the bottom line during the quarter.