Sluggish Demand Drags Down Earnings In Q1

Earnings growth of Indian companies may remain muted because of sluggish demand and subdued private sector investments, according to the early trends of the June quarter financial results.

Aggregate net profit growth of 281 BSE-listed companies that have reported June quarter results showed that profit growth has slowed to 8.49% from 23.8% a year earlier after adjusting for one-time gains or losses, according to data provider Capitaline. The figure is, however, an improvement from the preceding quarter’s 5.67%.

Operating profit margin, however, widened marginally to 22.49% in the June quarter from 20.74% in the preceding quarter. The earnings review excludes banks, financial services, and oil and gas firms as these companies follow a different revenue model.

Lower commodity prices in April-June helped keep profit growth intact to some extent as crude prices fell 2.7% and LME aluminium was 6% lower in the period. Raw material costs for the companies under review fell to at least a 13-quarter low. It declined 0.04% in the fiscal-first quarter compared to a 2.83% rise in the preceding March quarter. This is a sharp drop from 14.7% increase in last fiscal’s June quarter.

Pankaj Pandey, head of research at ICICI Securities Ltd, said declining commodity prices are hurting the metals sector while boosting margins for companies that use them as raw material.

“We were expecting a softer quarter for commodity-oriented sectors like metals due to lower commodity prices and inventory loss. This is exceptional for cement as earnings were largely driven by pricing. Overall sectors like pharma saw a broad base earnings recovery due to low base,” Pandey said. As the consumption slowdown was already factored in the quarterly earnings, it is not very disappointing so far, he said.

Analysts say factors such as lower interest rates and some budget announcements may boost growth in the coming quarters. The cost of capital has fallen led by repo rate cuts by Reserve Bank of India and general dovish commentaries by global central banks in this year. Also in the budget, the government has announced an initiative to tap overseas markets to meet part of its borrowing needs. “This should augur well for the interest rate and liquidity environment in India and also strengthen the currency,” an analyst said. – Live Mint

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