The gains from the unlocking of the Indian economy are visible in the early bird results for September 2020 quarter (Q2).
The combined net profit of 104 companies, which have declared results so far, is up 9.8 per cent year-on-year in Q2, a sharp turnaround from the earnings contraction seen in the previous two quarters. The combined net profit of the sample companies was down 3.4 per cent during Q1FY21. In the year-ago, or September 2019 quarter, their combined profit had grown by 20.1 per cent YoY.
As cities opened for business, it benefitted the topline of companies. Combined net sales (interest income in case of banks & non-bank lenders) of these early birds grew by 5.6 per cent YoY as against a decline of 3.3 per cent during the June quarter and 7.6 per cent growth during September last year. (See the chart)
The combined net profit of 76 manufacturing and service sector companies (ex-banks and IT services exporters) was up 23.2 per cent YoY during Q2, as against the earnings contraction in the previous three quarters. These companies’ net profit was down 41.3 per cent YoY in June 2020 quarter and by 31.4 per cent YoY in the March quarter.
Their combined net sales are up 4.5 per cent YoY during Q2 – the fastest growth in the last five quarters. In the previous two quarters, these companies had posted a 23 per cent and 11.6 per cent contraction in topline, due to the lockdowns imposed to curb the spread of coronavirus.
Banks and IT services exporters were least impacted by the lockdown as they were allowed to operate normally unlike manufacturers most of whom faced closures.
Analysts, however, remain cautious about the growth prospects of India Inc. “Earnings look good on a year-on-year basis, but volumes are still down in key sectors such as cement, indicating a tepid demand scenario in the economy. Earnings recovery has largely come from price increases and lower raw material & energy costs that may not sustain for long,” says G Chokkalingam, founder & MD, Equinomics Research & Advisory Services.
He also cautions investors from reading too much in the early bird results given the small sample size. “Majority of companies are yet to declare their results and good results are declared first every quarter. It would be premature to draw any conclusion based on these numbers,” he said.
There are around 5,000 listed companies in India, out of which around 3,500 are operationally active and report quarterly results. The early bird sample has 8 companies that are part of Nifty 50 index.
Cement makers and metal producers clearly show the impact of an uptick in prices of their products and a fall in costs boosting their profitability.
ACC’s net sales are flat YoY, while its raw material cost is down by a quarter. Thus, its operating profit is up 17 per cent and the net profit is up by 20 per cent YoY in September quarter. Zinc and lead producer, Hindustan Zinc shows a dichotomy between volume and profitability.
In fact, metal producers such as Hindustan Zinc, Tata Steel BSL, Tata Steel Long and Monnet Ispat topped the charts with strong double-digit growth in net sales. In contrast, biggies such as HDFC Bank, Tata Consultancy Services, Infosys, HCL Technologies, Wipro and Avenue Supermart either reported low single digit growth in revenue or a decline in their topline compared to the year-ago period.
Compared to the June quarter, however, HDFC Bank, Infosys, HCL Technologies, Britannia, Wipro and L&T Infotech reported a moderation in their top line growth.
Food and consumer goods makers such as Hindustan Unilever and Britannia are in the middle with high single digit growth in net sales and double-digit growth in earnings, thanks to gains from lower costs including raw materials.
For others, however, early bird results confirm the post Covid recovery in the economy.
“Most results have been on the expected line and confirm the steady improvement in economic and financial condition after a virtual shutdown in the economy during the June quarter,” says Dhananjay Sinha, head- research, Systematix Institutional Equity.
This, he says, has provided support to the current rally on Dalal Street. The Nifty 50 index is up 5 per cent since the beginning of this month.