India Inc’s earnings growth falters

A spate of poor results last week has derailed India Inc’s profit growth in the September 2018 quarter. The combined profits of about 940 listed companies are up just about 3 per cent year-on-year, against 12.5 per cent y-o-y in the June 2018 quarter.

The slow earnings growth overall in the recent September quarter has come about despite a low base: the year-ago period (September 2017 quarter) was a weak one, with just 1 per cent profit growth due to business adjustments following the GST rollout.

However, aided by higher volumes, India Inc’s revenue growth has kept up the momentum: 12 per cent last fiscal, 18 per cent in the June quarter, and now 21 per cent y-o-y in the September 2018 quarter.

Many dampeners

Profit growth has suffered due to many factors. The pressure from high commodity costs has been made worse by a weak rupee.

For the 550 manufacturing-based companies in this set, raw material costs rose nearly 39 per cent y-o-y, the fastest in many quarters. Market leaders such as Maruti Suzuki, Asian Paints and UltraTech Cement saw their profits dip 10-14 per cent in the September quarter, partially due to higher raw material costs.

Weak refining margins dragged down the profits of Indian Oil, HPCL and BPCL sharply. Overall, companies with raw material costs saw their profits dip about 7 per cent y-o-y in the September quarter.

Higher borrowing costs

Next, borrowing costs for India Inc remained high: they rose nearly 12 per cent y-o-y in the September quarter for about 780 entities, excluding banks and finance companies. Loans became costlier due to rising interest rates on domestic and foreign loans. Additionally, uncertainties in the global economy due to the ongoing trade wars dampened sentiment. Tata Motors, for instance, continued to mount losses due to poor sales of Jaguar Land Rover vehicles in China.

Also, public sector banks’ pain from higher provisioning for bad loans has lingered, and is reflected in the big losses posted by PNB and Syndicate Bank in the September 2018 quarter. Some private banks such as ICICI Bank also saw their profits dip y-o-y on this count, though their performance improved from the June 2018 quarter.

Intense competitive pressures took a toll, too. For instance, telecom major Bharti Airtel’s profit again dipped sharply owing to pricing pressures. Also, IndiGo Airlines descended into losses under the weight of high fuel costs, which it could not pass on due to competitive pressures.

Bright spots

It’s not all bleak, though. FMCG companies have put up a strong show, thanks to good volume growth. Sector leader Hindustan Unilever’s profit rose about 20 per cent in the September quarter. Also, the exported-oriented IT software sector has benefited from a pick-up in the US economy and a weak rupee. Companies such as Infosys, HCL Technologies and TCS have grown profits in the range of 10-23 per cent.

Many private banks, including leader HDFC Bank and beleaguered Axis Bank, have also done well. So has Reliance Industries, with an 18 per cent profit growth, driven by its petrochemicals, digital and retail segments. Engineering major L&T has delivered strongly, too, with 28 per cent rise in profit, aided by domestic orders. But on the whole, the negatives have outweighed the positives in the September quarter.

The recent moderation in oil prices could provide some cost relief for India Inc. But interest costs could rise, pushed up by the ongoing credit-flow problems, a fallout of the IL&FS fiasco. While the demand outlook overall seems reasonably good, the transient low-base benefit due to GST last year will fade.

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