Low input costs shore up profits even as revenues fall in Q3

Parvatha Vardhini C | Updated on January 19, 2018


The first cut eps

Net profit of 420 companies grows 4.2% year-on-year while the topline dips 3.4%

Corporates have shown an improvement in profits in the December 2015-16 quarter over the year-ago period, shows an analysis of 420 companies that have declared their results so far.

Cheaper inputs have helped shore up profits even as weak demand and price cuts continued to affect topline growth for most firms in the three months ended December 2015.

Companies catering to urban consumption and in the field of road infrastructure were among the bright spots. Firms in the export-oriented segment, such as pharma, did well too.

Banks and finance companies have been excluded from this analysis. With many companies yet to announce their numbers, the picture can change by the end of the earnings season.

Support at operating level

Net sales of the 420 companies that have declared their results dropped 3.4 per cent over the December 2014 quarter. The rout in commodities hurt the topline of companies in the metals, mining and steel sectors, while players in the oil and gas space bore the brunt of the fall in crude oil prices.

With the economy yet to gather speed, firms in the construction and power sectors saw their topline growth slow down too. Companies in the logistics space such as Gati and Container Corporation were exceptions. Despite this, there was a growth in their earnings.

The net profit of the 420 companies grew 4.2 per cent year-on-year in the December quarter. With ‘other income’, or earnings from non-core activities, such as treasury and sale of assets, dropping 13 per cent year-on-year, the profit growth was supported by operational performance.

The fall in input costs — raw material as a percentage of sales came down from 46.9 per cent in the three months ended December 2014 to 41.3 per cent now — helped the companies at the operating level.

Companies in the auto sector, such as Maruti Suzuki, TVS Motor, Gabriel India and MRF, among the most raw-material intensive, saw relief on this front. Lower prices of crude derivates also saw companies such as Asian Paints and Nerolac doing well both on the margins and bottomline fronts.

Overall, operating profits for the quarter grew 1 per cent year-on-year.

The growth could have been higher if not for the increase in staff costs and selling/other expenses. FMCG companies, for instance, increased advertising spends in a bid to shore up volumes.

Hindustan Unilever’s ad spend touched 14.5 per cent of sales this quarter. It was 12.8 per cent a year ago.

Similarly, other FMCG players Dabur, Emami, Godrej Consumer, Jyothy Labs also increased their ad spends. Also, employee costs as a percentage of sales moved up from 10.4 per cent in the December 2014 quarter to 12.1 per cent now.

However, cheaper inputs helped operating margins improve across companies. Operating margins rose from 19.8 per cent a year ago, to 20.7 per cent now.

Growth pockets

Companies such as Maruti Suzuki, PC Jeweller, Titan, Somany Ceramics, Symphony and TTK Prestige logging double-digit growth in sales and profits, pointed to improving urban consumption.

Besides, the sliding rupee aided the export-oriented pharma sector, which saw double-digit sales and profit growth. IT companies such as Infosys and TCS too benefited from the falling rupee.

Companies such as Ashoka Buildcon and IRB Infra did well too, thanks to the pick up in orders in the roads space.

Demand likely to rise

Better interest rate transmission, the Seventh Pay Commission payouts, and higher minimum support prices for agri commodities are expected to further boost consumption in the coming quarters.

Even if the commodity advantage wears off, greater demand and higher volumes could support growth.

Along with this, if investments speed up and translate into new orders, double-digit sales and profit growth for India Inc may not be far away.

Published on January 31, 2016

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