Tentative gains

The September report card from India Inc offers glimmers of hope for investors fretting about the lack of earnings growth to underpin runaway stock markets. BusinessLine ’s analysis of nearly 800 companies that have declared their results showed a rebound in net profit growth to 13.5 per cent year-on-year in the July-September quarter after a snail-paced expansion of 1.1 per cent in the preceding quarter. Net profits were powered by operating performance rather than ‘other income’. Operating profits expanded by 15.5 per cent after a 1 per cent contraction in the June quarter, on the back of a 11.7 per cent growth in revenues, a percentage point higher than in April-June 2017. All this suggests that India Inc may be recovering from the glitch-ridden transition to GST.

This shouldn’t really come as a surprise as only the largest and most entrenched firms across sectors are represented in the Indian listed space. However, investors need to take note that the growth revival has not been uniform across India Inc. Take consumer goods. With a strong acceleration in sales, automobiles (14 per cent growth), consumer durables (22 per cent), jewellery (26 per cent), paints (13 per cent) and FMCGs (8 per cent) have signalled a rebound in discretionary spending, but retail, entertainment and hospitality saw decelerating revenues. Listed firms in select sectors seem to have made one-off market-share gains from unorganised players, even as overall consumer spending grew moderately. Aggregate profit growth received a big helping hand from commodity sectors such as steel-makers (net profit up 181 per cent), refiners (25 per cent growth) and metals players (22 per cent). While sustaining this performance will depend on a continued global commodity rally, it is worrying that some of the ‘secular’ growth sectors of yesteryears — software (4 per cent net profit growth), pharmaceuticals (4 per cent profit decline) and telecom (profits down 63 per cent) — have reported dismal profit trends. Capital goods and infrastructure players continued to report more sluggish trends than consumer-facing firms.

Overall for India Inc, double-digit sales growth for the second consecutive quarter, better profit quality and margin expansion were the positive aspects of the numbers, but the upward creep in raw material costs and interest expenses were emerging pain points. Looking ahead, profit prospects for listed firms may continue to look up on their superior pricing power. They will also remain the key beneficiaries of the formalisation effect of GST and its recent tariff cuts. However, if the broad direction of India Inc’s earnings is positive for the markets, the moot question is if the quantum of that growth will measure up to expectations. Today Street estimates project profit growth for the Nifty 50 firms at 17 per cent for the next one year and at 19-20 per cent for the year after. Even with GST tailwinds, achieving this may prove a tall order.

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