While the profitability of Indian companies for the quarter ended September 30 was aided by falling global prices of key commodities like crude, iron ore, rubber and coal, the revenue growth pattern of companies that have announced their earnings this far suggests that a demand-led economic recovery in the country is still some time away.
The rate of growth in net profit and sales for these companies has slowed down when compared to the preceding quarters. The aggregate net profit of 724 companies (excluding banks and financial institutions) that have declared their earnings for the July-September period thus far—rose by 13.27% over the year ago period, led mainly by lower input costs. At the same time, their combined revenues grew by only 3.84%. The percentage growth in both top line and bottom line was the lowest in the last four quarters.
The aggregate raw material costs of these companies remained flat year-on-year and this brought down the ratio of raw material cost to sales, thereby boosting the bottom line. The ratio of raw material expenses to revenues stood at 48.02% for this set of firms, the lowest proportion in the last eight quarters. Companies such as JSW Steel— that reported a strong 200 basis points increase in operating profit—saw raw material cost per tonne of steel coming in at a five quarters-low, aided by global weakness in coking coal prices. One basis point is one hundredth of a percentage point. Two wheeler-maker Bajaj Auto’s raw material cost, as a percentage of sales, declined by 190 basis points year-on-year to 68.9% on lower material cost pressures and improved product mix.
The comparatively weaker percentage growth in net profit for these firms was also further driven by non-operational factors like a 25% year-on-year rise in other income and lower interest costs that fell 14.8 percentage points.
Profitability growth in the September quarter was led by telecom and automotive companies. Bharti Airtel posted a 170% increase in net profit over the corresponding period last year, led by a 13% increase in operating profit and Idea Cellular reported a 69% increase in net profit on the back of strong-than-expected data revenue growth of 22% and a 160 basis points improvement in operating margins.
Out of the 34 Nifty- 50 non-financial companies that have announced their earnings so far, around 18 managed to beat Street expectations. Telecom and auto companies such as Idea Cellular, Bharti Airtel, Hero Motocorp and Maruti Suzuki surpassed market expectations with the set of numbers they reported, while FMCG and IT firms like Hindustan Unilever, ITC, Tata Consultancy Services, Wipro and Tech Mahindra disappointed.
Even within specific sectors, different companies have seen divergent results in the second quarter of fiscal 2015. While Infosys beat estimates with a constant currency revenue growth of 3.9% and a 100 basis points improvement in operating margins on a sequential basis, TCS missed Street expectations with a quarter-on-quarter revenue growth of 6.4%.
Oil-to-yarn and retail conglomerate Reliance Industries reported a better-than-expected consolidated net profit growth of 1.7% driven by higher gross refining margins and robust earnings from the polymers business, but Cairn India on the other hand missed estimates with net profit plunging 32.7% because of a planned shutdown. For some companies, growth in earnings came from higher price realisations, rather than better sales volumes. Hindustan Unilever’s sales volumes grew at a modest 5% year-on-year after witnessing a 6% growth in the June quarter, but increased price helped domestic revenues grow by 10.4%.
There were a few companies that witnessed a pickup in volumes as well, especially discretionary products manufacturers like auto companies. Hero Motocorp saw its net sales rise by 20.5% over the year earlier, led by a 19.5% volume growth and Maruti Suzuki posted a topline growth of 17.5%, mainly on account of a 16.8% improvement in sales. The growth in volumes came at the cost of muted price realisations, with Maruti offering an all-time high discount of over R21,000 per vehicle on an average.
Rakesh Arora, head of research at Macquarie Capital says that the earnings reported so far have been disappointing. “We believe that things on the ground have not picked up yet and we may see some downgrades at the end of the earnings season,” Arora said. “The majority of the big results are yet to be out and it is likely we may see more negative surprises in the coming week.”
Arora, however, says that markets are looking much beyond fiscal 2015 earnings, given the recent positive macroeconomic factors with policy reforms being put into place under a new government.
Management commentary too seems to suggest that they expect better days ahead. Hindustan Unilever’s management said that input cost inflation had started trending downwards near the end of the quarter and its sales growth in rural areas, which comprises majority of the Indian population, outpaced urban growth. Maruti Suzuki’s management also indicated it was seeing a revival in demand from first-time car buyers, who contributed to 42% of its total sales in the first half of fiscal 2015, as against 37% in fiscal 2014.