Earnings growth rises to 6 quarter high

Earnings growth rises to 6 quarter high

India Inc reported strong earnings growth in the December 2017 quarter after declines in the previous two quarters. This was largely expected given the lower base effect due to demonetisation in the year-ago quarter. What’s more encouraging is that some analysts believe that the momentum will continue in the coming quarters. Improved sales volume, ability to increase product prices to pass on higher input costs, better project execution and increasing order books are some of the factors that support the optimism.

In the December quarter, net profit of a sample of 2,043 companies rose to a sixquarter high of 27.5 per cent year-on-year. Net sales rose by 11.5 per cent. In the previous quarter, sales had risen by 8.7 per cent, while net profit had fallen by 1 per cent. The sample excluded banking and finance companies.After excluding oil and gas companies along with banks and finance entities, sales and profit growth in the December 2017 quarter was 8.8 per cent and 25 per cent, respectively.

The performance was driven by a stellar show by consumer-focused businesses. On the other hand, sectors including cement, capital goods, IT, pharma, power, public sector banks and private banks with high corporate exposure and telecom continued to show stress.“Automobile companies reported betterthan-expected performance. Also, the volume growth delivered by consumer-focused companies and market share gains by retail banks were encouraging,” said Sonam Udasi, fund manager, Tata Mutual Fund.

Consumer focused companies reported a strong comeback on the profit front. A sub-sample of 491 from sectors including automobiles, beverages, fast-moving consumer goods (FMCG), hospitality, jewellery, media and entertainment, retail and textiles reported 23 per cent growth in net profit, the strongest in five quarters.

The growth was on the back of a 14.9 per cent drop in profit in the year-ago quarter. Net sales rose by 3.8 per cent, nearly double than the growth of 2.1 per cent in the year-ago quarter.In the case of capital goods sector, while the quarterly performance was less than encouraging, analysts believe a turnaround in visible. “Though the third quarter performance of the capital goods companies was subdued, their prospects look better considering improved order books and better execution,” said Mayuresh Joshi, fund manager at Angel Broking.

The operating margin of the larger sample, excluding banks and finance companies, improved to 16 per cent from 15.2 per cent in the year-ago quarter. Companies in the automobile, lubricant, FMCG, and metal sectors were able to pass on the increase in input costs to consumers by raising product prices. This supported margins,” said Joshi.

Analysts are optimistic about the future course. The March 2018 quarter is also expected to benefit from the low base of the previous year’s comparable quarter. Besides, demand across sectors is expected to pick up.“Things look incrementally better. The growth will likely be better in the March quarter compared with the year ago,” said Udasi.According to Angel Broking’s Joshi, sectors including roads, power, rural housing and finance, and consumption-based companies look promising. “Companies with strong business models will benefit due to the shift towards organised sector from unorganised entities,” he said.

The Economic Times, New Delhi, 15th February 2018

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