Sun and shade

Listed companies have managed to report fairly decent earnings growth for the March quarter of FY18 compared to the same period a year ago. But when the performance of banks is taken in to account, the numbers turn quite bleak. While aggregate revenue was 14 per cent higher compared to the March 2017 quarter for the 541 companies that have announced their Q4 results for this fiscal, profit was sharply down 15 per cent for this universe. This is in sharp contrast to the third quarter of FY18 when profit growth was very strong with companies emerging from the negative fallout of GST rollout. The contraction in earnings for the first set of companies has been led by banks and financial sector. If the results of banks and NBFCs are excluded, the profit has grown 13 per cent.

It is obvious from the earnings numbers that the banking sector is under stress. The RBI’s February circular that removed the old restructuring schemes and put forth a revised framework for recognising stressed accounts has resulted in sharp increases in slippages in the March quarter, resulting in many banks reporting significant losses. With lingering concerns over under-reporting of stressed assets, doubts over the recoverability of the loans under IBC and the uncertainty over the new RBI norms requiring banks to report one-day default, the pressure on the banking sector can continue for few more quarters. Some private banks have, however, managed to perform well due to strong loan growth and dominance of corporate lending. Apart from banks, power, telecom and smaller steel companies are also displaying stressed bottom lines. But many of the other sectors in the listed universe are continuing to report good earnings growth. Consumption driven sectors such as automobiles, FMCG and consumer durables have been doing brisk business that is reflected in good earnings growth. Many real estate companies also appear to have turned the corner.

Investors, however, need to wait for the results announcements of the rest of the listed companies before turning more bullish. Companies that are not performing too well tend to report their earnings towards the latter part of the earnings season. Also the set of results announced so far show that higher input costs are beginning to hurt manufacturing companies, as commodity prices have moved higher in the March quarter. With the rupee losing ground, the cost of imported raw materials could further pressure margins of the listed companies in the coming quarters. Similarly, with the spike in market borrowing rates, finance costs have also been moving up. So far listed companies have protected their margins by controlling costs, even in periods of depressed demand. The spike in direct costs will remove that cushion. With valuations, especially of mid- and small-cap companies at elevated levels, it would be best to moderate return expectations.

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