PROFIT GROWTH IS SLOW...MARKETS RUN IS FAT...!!

Early birds at variance with stock market highs

At 2.2%, net profit of 290 firms grew at its slowest pace in last 8 quarters; net sales were down 4.4% y-o-y

Krishna Kant  |  Mumbai  

January 25, 2015 Last Updated at 15:46 IST

Corporate earnings do not seem to refect the buoyant mood on Dalal street, which is currently perched on a new high. Early bird results for the third quarter have been one of the worst in at least last two years and analysts expect numbers to go down further as most of the top companies in stressed sectors such as capital goods, construction & infra, metals & mining, oil marketing and auto are still to declare their third quarter results.

The combined net profit (adjusted for exceptional items) of 290 companies that have declared their result was up 2.2 per cent on year-on-year basis in the December 2014 quarter, growing at its slowest pace in the last eight quarters. The same set of companies had reported 9.8 per cent and 12.6 per cent year-on-year growth in their earnings in the second quarter and corresponding quarter last fiscal respectively (See chart).

Topline growth was even worse, indicating the twin problems of demand drought in the economy and price deflation. Net sales for the sample declined by 4.4 per cent on y-o-y basis, showing first decline in atleast last eight quarters.

Financial performance of 290 companies
Y-o-Y growth (%)
Quarter	Net sales	PBIDT	Adj net profit
Mar-13	6.9	15.3	19.9
Jun-13	3.8	10.3	9.1
Sep-13	16.1	14.7	16.4
Dec-13	12.7	14.1	12.4
Mar-14	14.9	13.9	14.1
Jun-14	12.4	8.8	12.3
Sep-14	2.7	12.8	9.8
Dec-14	-4.4	8.8	2.2

The picture look even worse if the earnings forbanking &financial services andInformation Technologyare excluded from the sample. Without these two, net profit for the sample declined by 4.8 per cent in the third quarter over the same quarter last fiscal while net sales was down 11 per cent, showing their worst performance in last eight quarters.

“The numbers reflect the economic reality at the ground that has worsened beginning October this year and the pain would last for few quarters more before demand begans to rebound. This doesn’t reflect in the stock valuations as the market discounts future earnings growth rather than the past. Stock prices are pricing in a economic recovery and faster earnings growth beginning next year,” says G Chokkalingam, founder & CEO, Equinomics Research & Advisory.

There was some good news for the bulls as lower commodity prices provided some to the corporate earnings. The bottomline was also cushioned by higher other income as bonds and equities help CFOs book some treasury profits.

Raw material cost for non-financial and non-IT companies was down 22.7 per cent y-o-y in the third quarter. This led to 68 basis points quarter-on-quarter improvement in core operating margins (excluding other income) to 14.3 per cent of net sales in the third quarters. Margins were up 115 basis points on year-on-year basis. One basis points is one-hundredth of a percent.

Performance of non-financial, non-IT firms
Quarter	Net sales	PBIDT	Adj net profit
Mar-13	2.3	21.3	14.2
Jun-13	-1.3	2.7	13.3
Sep-13	11.9	9.9	13.0
Dec-13	8.3	1.1	13.2
Mar-14	12.8	6.8	13.8
Jun-14	10.3	3.1	11.9
Sep-14	-0.6	4.6	13.6
Dec-14	-11.1	-4.8	14.3
Source: Capitaline; Compiled by BS Research Bureau

Other income for the entire sample was up 30.9 per cent in the third quarter down from 44 per cent y-o-y growth reported in the second quarter but a sharp improvement from 6.4 per cent growth during the corresponding period in the last fiscal.

Other income for sample ex-bank & finance was up 30 per cent y-o-y compared to 48.6 per cent y-o-y growth in the preceding quarter and 7.5 per cent y-o-y growth during the corresponding quarter a year ago. Other income accounted for a fifth of the operating profit (EBIDTA) for these companies up from 15.8 per cent in the third quarter of last fiscal.       

In the previous quarters, IT exporters such as Tata Consultancy Services, Infosys, Wipro, HCL Tech and Tech Mahindra among others has more than made for a poor show by industrial and manufacturing companies. This was missing in the currrent quarters as IT exporters reported their worst quarter in last two years led by industry well weather TCS, which reported flat profit growth in the last quarter.

The net profit for IT companies was up 6.3 per cent y-o-y in the third quarter down from 15.4 per cent in the previous quarter and 32.7 per cent y-o-y growth during the corresponding quarter last year. Analysts attribute to continued economic recession in Euro zone and Japan that negated the upside from United States.

For others early birds confirm the growing disconnect between the stocks market and the underlying economic and corporate fundamentals. “With each passing quarter the gap between market expectaions and actual delivery by corporates is widening. Stock indices continue to make a new high even as earnings downgrades have invceased. At this rate the price-earmnings valuations of benchmark indices such as Sensex will enter the bubble zone,” says Dhananjay Sinha.

According to him, incremental liquidity flow on account of actions by major central banks is now a much bigger factor for the markets than cororate earnings. As long as bulls have access to liquidity they will comtinue to bid-up stocks price regardless of the earnings in the absence of alternative assets.

http://www.business-standard.com/article/companies/early-birds-at-variance-with-stock-market-highs-115012500337_1.html