Analysis. Early Q4 results indicate weakening in demand

Early results of the fourth quarter of 2018-19 indicate that India Inc may have shrugged off the slowdown in earnings growth seen in the three months ended December 2018.

Reported profits of about 250-odd companies grew at a brisk 21.2 per cent over the fourth quarter of 2017-18 ( i.e. year-on-year growth), a much better performance than the 7 per cent year-on-year growth put up by the same companies in the October–December 2018 period.

But the growth seems supported more by tailwinds at the operating level and by one-offs rather than demand for products and services. Consolidated numbers have been considered wherever applicable. Results of banks and finance companies have been taken into account at the level of sales and profits alone.

Pockets of weak demand

Net sales, which grew at a brisk 26-27 per cent in the June, September and December 2018 quarters, slowed to 16.2 per cent in the last quarter of fiscal year 2018-19. Banks and IT companies did well, but with rural consumers tightening their purse strings and liquidity crisis continuing, consumer sectors saw weaker offtakes.

Sales of automobile players declined 0.5 per cent this quarter. Sales growth for auto ancillaries and fast moving consumer goods (FMCG) tapered to single digits after growing strongly in the last three quarters. The agro chemicals sector, too, was affected, witnessing an 8 per cent fall in sales. Companies in the NBFC space also saw their topline growth slowing, after a robust performance earlier.

Support from operations

However, what supported bottomline growth was the brisk operating performance. Operating profits for the quarter grew at a strong 63.5 per cent. For one, benign raw material costs helped. Raw material cost as a percentage of sales came in at 42.9 per cent, around the same levels as the March 2018 quarter.

Although crude oil prices moved up during the quarter from the October 2018 low, hurting companies such as Kansai Nerolac, lower prices of metals such as zinc, copper and aluminium, and other inputs such as palm oil, milk and sugar, were a positive. The fall in lead prices helped battery maker Exide Industries expand margins by 70 basis points to 14.4 per cent.

Pharma companies also saw good margin expansion. FMCG companies such as Hindustan Unilever also achieved higher operating margins by controlling advertisement costs. Operating margin for the company expanded by 80 basis points over the three months ended March 2018 to 23.3 per cent now. A tighter leash on employee costs and other expenses also helped. Overall operating margins for the sample came in at 16 per cent, higher than the 11.7 per cent seen in the March 2018 quarter.

Adjusted profits take a hit

Despite a 48 per cent drop in other income, a good operational performance along with lower growth in interest, depreciation and taxes supported the bottom line.

However, the robust growth in reported profits dwindles when adjusting for one-off items. Adjusted profit growth for the 250–odd companies comes in at just 0.3 per cent, slower than the 4.7 per cent growth recorded in the December 2018 quarter and a far cry from the 16-20 per cent growth in the first two quarters of 2018-19.

Going by the initial set of results, with demand weakening and input prices expected to remain volatile, India Inc. may not have it easy in the coming quarters.

However, a clearer picture could emerge later when a majority of the results are announced.

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