With no negative surprises in Q2, experts heave a sigh of relief

After a lackadaisical period of three-four quarters, the performance of India Inc in the July-September 2017 quarter has enthused analysts and market experts as there have been no negative surprises in any of the key three parameters: sales, operating profit and net profit, though growth rates have been modest.

According to Edelweiss Research, “Breadth was better as, barring banks, most sectors surprised on the positive side.”

“2QFY18 results were generally good with modest improvement in underlying trends in the case of a few sectors. 2QFY18 results saw earnings upgrades for FY2018E and FY2019E, the first after several quarters of downgrades of earnings,” Kotak Institutional Equities added.

Restocking after implementation of the Goods & Services Tax, early festive season, higher commodity prices and government spending (in rural areas) helped NSE 500 companies (excluding financial services, oil and gas) report a topline growth of 8.3 per cent year-on-year in the September 2017 quarter, compared to 6.7 per cent in the June 2017 quarter, according to data provided by Capitaline.

Growth in operating profit and net profit also improved to 11.7 per cent (double-digit after a long time) and 4.8 per cent in the September 2017 quarter versus 2.3 per cent and 0.2 per cent in the June 2017 quarter, respectively.

Financial services are excluded for the analysis as these are reported in a different format unlike manufacturing companies and also because of non-performing assets, which affect profit differently every quarter. Oil and gas companies are also excluded for the analysis due to government subsidies. These two sectors, comprising 74 companies in the Nifty 500, have a total market capitalisation of ₹34.4 lakh crore, while the market-cap of the remaining 411 companies stood at a much higher ₹89.7 lakh crore.

Large-cap companies (read Nifty 50) have done better than the broader universe of NSE 500 companies. Topline, operating profit and net profit of Nifty 50 companies (excluding financial services and oil and gas) in the September 2017 quarter grew 11 per cent, 14 per cent and 6.5 per cent, respectively.

In terms of sectors, metal has been the best performer, followed by automobile, cement and oil marketing companies, while telecommunication, pharmaceutical and infrastructure disappointed. Excluding metals, oil and gas and banks, growth in net sales, operating profit and net profit of NSE 500 companies have come in lower at 7 per cent, 10 per cent and 1.6 per cent, respectively.

Analysts are cautiously optimistic on the performance in the second half. Topline growth is expected to improve in the second half due to lower base of demonetisation, higher government spending and revival in rural economy (due to good monsoon, government spending). But margin pressure, due to rising commodity prices, including of crude oil, will be seen.

“Margin pressure will intensify Q3FY18 onwards given the sharp increase in global commodity prices and hardening of short-term interest rates,” points out Emkay in a report. Kotak Institutional Equities earlier cautioned that India’s macro outlook has dimmed with likely higher current account deficit, gross fixed deficit and inflation due to higher crude prices and weaker-than-expected tax revenues. However, overall India Inc seems to be on a recovery path and earnings looks to have bottomed out with GST disruptions easing. According to channel checks done by Antique Stock Broking, a pick-up in restocking is underway in the current quarter and should aid recovery.

“Overall, the underlying common theme across sectors is that the impact of GST transition is abating and activity levels in the current quarter are already picking up,” it said.