Although profit growth was positive even in the previous quarter, a pickup in sales growth has surprised this quarter.
The sharp rise in corporate profits in the third quarter, and the resulting series of earnings upgrades are now pushing the Dalal Street further up, taking over from the Budget-driven share market rally. The aggregate profit growth of BSE 500 companies has accelerated to nearly 46% on-year in the fiscal third quarter, hinting at broad-based recovery and not just in select few big names. Along with a jump in profits, cost optimization has resulted in EBITDA growth, which has further led to sequential earnings upgrades, something that does not come very often on Dalal Street.
Equity strategists vouch for earnings propelling equities
- “Globally earnings season is driving markets which are flirting near all-time highs. A combination of positive sentiment, positive FII flows and very healthy earnings could keep markets at elevated levels in the near future,” said Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities, earlier this month.
- Going ahead, the overall long term structure of the market remains positive given the confluence of economic recovery, containment of COVID-19, earnings beat, and an expansionary Budget, Siddhartha Khemka, Head – Retail Research, Motilal Oswal, said last week.
- Credit Suisse has termed India’s EPS momentum as the strongest among other Asian peers while it upgraded India to overweight in the Asia Pacific portfolio.
- Motilal Oswal has raised Nifty 50 EPS estimates for the next two fiscal years by 2.8% and 3.2%, respectively.
Not just profits: Sales pick up, costs fall, margins expand
Although profit growth was positive even in the previous quarter, a pickup in sales growth has surprised this quarter. Excluding commodity companies, the aggregate sales growth turned positive after three consecutive quarters of decline, hitting a six-quarter high. Owing to the pandemic, companies have taken up cost-cutting measures to sustain amid the challenges posed by the pandemic. Wage costs, despite profit growth, have barely grown from the previous quarter. However, higher realization on sales and cost optimization has helped EBITDA growth. Barring utilities, every other sector reported an EBITDA margin expansion.
Profit rise broad-based
- Nifty 50: Up 26% on-year (ICICI Securities)
- Nifty Next 50: Up 37% on-year (ICICI Securities)
- Midcap100: Up 80% on-year (ICICI Securities)
- Nifty200: Up 31% on-year (ICICI Securities)
- MOFSL Universe: Up 33% on-year (Motilal Oswal)
- Domestically-oriented sectors (aggregate ex-financials, commodities, IT & Pharma): Up 22% on-year (IIFL Securities)
How it helps corporate outlook
This significant improvement in net profit now places India Inc in a much comfortable position to service debt. Though, rising interest rates in the wake of inflation and higher government borrowings could pose a risk.