Q3 earnings review: Early Q3 trend shows weak sales, but double-digit net profit growth

MUMBAI: The initial trend in the third-quarter results of a sample of 70 companies so far shows a double-digit growth in the aggregate net profit but a weaker single-digit growth in net sales, thereby reflecting the tax cut benefit at the bottom line amid poor demand.

Aggregate net sales of the sample grew by 3.9 per cent whereas net profit increased by 15 per cent year-on-year in the December quarter.

The growth numbers are likely to vary significantly with more companies reporting numbers in the coming weeks. The current trend is influenced by the performance of Reliance Industries (RIL), the country’s largest company by revenue, and companies in the information technology (IT) sector. Together, they contributed more than three out of every four rupees of the sample’s net sales and net profit.

Amid a rally in the stock market, economic commentary looks sombre and corporates are likely to reel under the pressure of slowing demand for yet another quarter. “The third-quarter earnings-report season will be more of the same with financials driving the quarter and commodities dragging it,” said Motilal Oswal Financial Services (MOFSL) in a preview report.

While overall trend in the topline is expected to remain weak, some analysts expect a marginal improvement in the third quarter over the previous one. “The fact that nearly half of the companies under our coverage are expected to show an improvement in yearon-year growth trajectory over Q2 (34 per cent companies showed improvement in Q2 over Q1) suggests that the improvement is broad-based,” said Emkay Global in a report while estimating 0.3 per cent aggregate revenue growth for the companies it covers.

At Rs 1,56,802 crore of revenue from operations, RIL contributed nearly 47 per cent to the sample’s topline. Its net profit of Rs 11,841 crore was 28 per cent of the aggregate profit. The nine IT companies that have declared results so far contributed 46 per cent to the net profit and 32 per cent to the revenue of the sample.

The performance by four banks and 11 finance companies that have reported numbers so far supported the sample’s growth. After excluding them from the sample, net sales shrank to just 2 per cent while profit growth decelerated to 10 per cent.

Any signs of demand revival and the government’s stance in the upcoming Union Budget will be crucial indicators for investors. “Corporate commentary on the underlying demand scenario and any sequential improvement post government announcements will be the key monitorables,” mentioned MOFSL in the report.