Q2 earnings: Tax cut shores up India Inc’s profit, but revenues slip


ET Intelligence Group: India Inc’s revenue dropped marginally in the September quarter, the first decline in nine quarters, reflecting demand-side woes, destocking of piled-up inventories and a higher base effect in the form of double-digit growth in the year earlier. However, net profit grew in double digits, helped by a cut in corporate tax rate and buoyed by the financial sector.

Given sluggish economic indicators, analysts said a dramatic revenue recovery is unlikely in the remainder of the fiscal though operating margins may improve due to cost cutting and streamlining of operations.

Net profit — based on a common sample of 1,697 companies that have declared results for each of the 13 quarters to September 2019 — increased by 22.5 per cent, while revenue fell 0.2 per cent. Excluding banks and financial services (BFS) institutions, the growth in net profit moderated to 11.3 per cent while revenue fell 3.3 per cent.

The data excludes financials of Bharti Airtel and Vodafone Idea.

Bharti Airtel reported a one-off net loss of Rs 23,045 crore, which includes provisioning for adjusted gross revenue (AGR)-related dues following the October 24 Supreme Court order.

Vodafone Idea reported a net loss of Rs 50,921.9 crore in the September quarter. Put together, the losses by these two telcos were 57 per cent of the larger sample’s total profit of Rs 1.3 lakh crore.

“India Inc’s top line has been under pressure due to weak demand both at business and consumer levels and is expected to remain in single digits for the second quarter,” said Deepak Jasani, research head, HDFC Securities. “Also in the base quarter (September 2018), sales of listed corporates jumped more than 23 per cent.” He added that lower commodity prices resulted in lower top line growth for a host of companies, including metals.

The operating margin of the sample including BFS was marginally lower by 40 basis points (bps), or 0.4 percentage point, year-on-year at 16.4 per cent. Excluding BFS would narrow it to 13.9 per cent, similar to the year-ago level. Margin performance was mixed at the sector level.


‘Sharp Recovery Unlikely’

“Cement reported a sharp 400 bps year-on-year expansion in operating margin. Consumer and pharma saw 50 bps expansion each. Metals saw a steep 570 bps contraction, while oil and gas, and technology margins contracted 80 bps and 100 bps, respectively,” said Gautam Duggad, research head, Motilal Oswal Financial Services. He expects pressure to continue on the margins of commodity companies, given weak prices and lower volumes.

On the sectoral front, consumer goods showed resilience whereas most of the core sectors were under pressure.

“The sectors where performance was resilient included IT, pharma, private banks, FMCG (consumer goods) and multiplexes,” said Pankaj Pandey, research head, ICICI Direct. “The ones which were weak included telecom, media (excluding multiplexes), oil marketing, metals, retail and logistics.”


While the short-term scenario is gloomy, corporate performance may have bottomed out, some analysts said.

“Going by the poor macro numbers, GDP growth and corporate revenue growth is unlikely to show a significant spurt in the second half of FY20,” said Jasani of HDFC Securities. “However, companies may keep improving margins by cutting costs, improving working capital use, and postponing capital expenditure and commissioning of projects.”

Pandey of ICICI Direct expects growth in earnings per share (EPS) to improve over the next few years. “On the back of tax rate cuts, heavy lifting by BFSI (banking, financial services and insurance) and stable performance by other sectors, we expect Nifty EPS to grow at a CAG of 20.3 per cent in FY19-21E compared with 16.9 per cent earlier,” he said. Index-heavy banking and finance companies will lead the recovery amid the resolution of stressed assets and inversion of gross non-performing cycle, he said.

According to Motilal Oswal’s Duggad, “Corporate tax cuts have prevented any sharp earnings downgrades in 2QFY20 — our Nifty EPS estimate for FY20 is stable at around Rs 535,” he said.


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