Earnings Respite

The earnings season started out on a weak note, but went on to record 10 per cent net profit growth - the fastest in the past six quarters, while revenue growth bounced back to a five-quarter high of 2.2 per cent, according to data sampled from Ace Equity, involving 2,416 companies (excluding banks, financial institutions, and oil & gas companies).

However, things do not look that great for the financial year 2015/16 as broad-based recovery is still underway, reveals an analysis of over 1,300 companies, wherein top line growth remained lacklustre at just 1 per cent compared to 2014/15. Net profits, however, showed some recovery, registering a growth of 4.5 per cent compared to a contraction of 1.1 per cent in the year-ago period.

"This quarter is surely the best after five quarters, in terms of year-on-year growth from the larger picture point of view. This may be the beginning of the broad-based growth cycle. The improvement was experienced at the top line as well as at the EBITDA and net profit levels," says Jagannadham Thunuguntla, Head of fundamental research, Karvy. Earnings before interest, taxes, depreciation and amortisation, or EBITDA, is an indicator of a company's operating performance.

Experts say the earnings cycle has started turning because interest costs are lower and commodity prices have bottomed out. The International Monetary Fund's primary commodities price index has declined 19 per cent since August 2015.

But here is another set of numbers that tells a different story. The growth in headline numbers of sample companies, which included the oil firms, was disappointing with net sales contracting by 3 per cent in the last quarter of 2015/16 and bottom line growth slowed 13 percentage points over the last two quarters. Says Thunuguntla: "Oil and gas is a global phenomenon. These commodities have experienced multi-decade lows in an unprecedented bear market. This has taken a toll on the Indian oil and gas space also. However, initial signs of the sector bottoming out had started emerging when crude oil saw a sharp bounce from $28 per barrel level. However, it may take some more time to witness confirmed recovery and turnaround in the oil and gas space."

On the margins front, however, corporate India has witnessed some improvement with operating and net profit margins increasing 2.1 percentage points and 1.3 percentage points, respectively, over the past four quarters. "The improvement in operating profit margins has been primarily driven by lower raw material costs on the back of declining crude oil and other commodity prices resulting in lower operating costs. The improvement in operating profit margin has also translated into net profit margin expansion. This, despite a slight increase in interest costs," says Mitul Budhbhatti, Deputy General Manager, CARE Ratings.

Raw material costs, as a per cent of net sales, have declined more than 2 percentage points since the fourth quarter of 2014/15, but interest costs have inched up around 30 basis points over the period. "Interest expenses as per cent of net sales have actually gone up for companies during Q4FY16 both on quarter-on-quarter and year-on-year basis. This can be primarily attributed to companies needing to fund elongated working capital cycles in light of a slowdown resulting in inventory pile-up or stretching of receivables. The full impact of lower interest rates in the system may be seen next year," says Budhbhatti.

Sectorally, there were not too many surprises. Construction and real estate sector saw operating profit margins improving around 3 percentage points over the previous quarter. Consumer goods, too, had a smooth ride with decent growth in profitability ratios. The consumer space saw Hindustan Unilever's operating margins improving 1.4 percentage points over the previous quarter, while construction and real estate firms, such as Parsvnath Developers and Godrej Properties, witnessed margins rise by 3 percentage points and 7 percentage points, respectively, during the period.

Says Budhbhatti: "Consumer goods and construction sectors are likely to benefit from lower raw material costs and steady sales realisations resulting in better operating profit margins. In case of real estate, there has been some traction in terms of project completion and sales vis--vis previous periods, which resulted in improvement." Margins of information technology companies, however, were a mixed bag.

It was of no surprise given the laggards this season. Asset quality and earnings performance of banks witnessed muted operating growth. For the telecom sector, things were better-off sequentially, though it witnessed muted operating growth. On a standalone basis, telecom major Bharti Airtel posted a 25 per cent decline year-on-year in its earnings before depreciation and taxes, but managed 1 per cent growth over the previous quarter. Major regulatory moves are awaited in this space.

India Inc. looks in no hurry to add capacities as the private sector saw 9 per cent decline in the number of new investment projects announced in the March quarter compared to the December quarter. Even in the absence of any major capital market activity, the benchmark index Sensex managed to climb 1.8 per cent during the period. Foreign portfolio investors invested Rs 4,495 crore in Q4 of 2015/16 - significantly lower than the Rs 36,472 crore invested in the corresponding quarter of last fiscal.

In fact, a little assistance from the rain gods could help in gaining more ground as a good monsoon could drive consumption and improve sentiment.