Mumbai: Indian companies reported a slight improvement in business environment in the September quarter from the preceding three months amid lingering issues surrounding the goods and services tax (GST) and depressed rural demand, a review of the latest earnings reports showed.
Corporate earnings are still to recover fully from the twin effects of the disruptions caused by the GST rollout and last year’s shock demonetisation move.
Restocking of goods by traders and distributors after 1 July, when the new indirect tax system took effect, lifted sales somewhat from the June quarter, when growth in Asia’s third-largest economy came in at the slowest in three years.
Demand in the first few weeks following the implementation of GST was slow as businesses were still adjusting to the new tax system, said Ravi Gopalakrishnan, head of equities, Canara Robeco Mutual Fund. “The results declared by companies so far have been mixed, but largely around expectations. Volume growth in sectors such as cement, automobiles and select consumer items has been better than expectations, thus translating into better margins,” he said.
While a focus on cost cutting in the quarter has had encouraging results, underlying demand is still weak when compared to the year earlier period, analysts said.
Net sales of 172 BSE-listed firms which have reported quarterly earnings so far rose at a faster pace of 8.55% in the September quarter compared with the 5.84% growth in the preceding three months, data compiled by database provider Capitaline showed. Net profit after adjustment for one-time items rose 6.09% in the fiscal second quarter from 4.43% in the preceding three months.
In the quarter ended 30 September 2016, the firms’ net sales growth had slowed to 9.03%, the lowest in three quarters, while adjusted net profit rose 10.31%. The review excludes banks, financial services firms and energy firms.
Revenue growth remains subdued for most consumer firms, said Prateek Parikh, an analyst at Edelweiss Securities Ltd. “There is some bounce back due to restocking; however, toplines of rural-focused companies in the first half of FY18 remain weak. It’s worth noting that Hindustan Unilever’s average volume growth in the last six quarters (period of normal monsoon) is just 1%,” he added.
In the September quarter, the net profit margin of the 172 companies expanded marginally to 14.79%, while operating profit margin widened slightly to 24.46%. Firms’ raw material costs also declined in the year so far despite a 6.37% increase in Brent crude prices in 2017.
Analysts say valuations of Indian markets are at elevated levels and earnings cuts continue. An earnings recovery, they say, will take some more time as GST transition woes will linger on. Bloomberg data shows Nifty firms’ consensus earnings per share forecast for the current fiscal has been cut by 9.1% since April; for 2018-19, it has been cut by 4.6%. The 50-share Nifty now trades at 20.9 times 12-month forward earnings, making it one of the costliest benchmark gauges.
“We believe there could be some more downgrades to earnings. Valuations of Nifty are on the expensive side as of now and unless earnings growth picks up meaningfully, these valuations are not sustainable. We believe earnings revival is still three-four quarters away,” said Vinod Karki, vice-president, strategy, ICICI Securities Ltd. Year-to-date, the Sensex and Nifty are up 24-26%, while MSCI World and MSCI Emerging Markets are up 16.18% and 28.76%, respectively.
“Market valuations are undoubtedly expensive mainly due to a very suppressed earnings growth owing to temporary disruptions from structural reforms. Hence, our view is that high valuations could sustain for much longer,” added Parikh.