Q2 Results – Bottom-line flatters; top-line falls short

If you eliminate the telecom story from the quarterly results, India Inc has redeemed itself fairly well in the September quarter.

Nov 18, 2019 10:11 IST India Infoline News Service

Quarterly Results
Towards the end of the Q2 results season, the narrative has suddenly shifted to the telecom space. Between Vodafone Idea, Bharti Airtel and RCOM, they have declared net losses of Rs100,000cr for the second quarter. Vodafone Idea alone reported a net loss of Rs50,922cr in the September quarter, making it the worst reported loss in the history of corporate India. But these losses have to do with AGR charges, pursuant to the Supreme Court order. To that extent, it is an exceptional item. If you eliminate the telecom story from the quarterly results, India Inc has redeemed itself fairly well in the September quarter.

Net profits – predominantly a tax story
As mentioned earlier, we will have to eliminate the telecom story to get a clear picture of the actual profitability of Indian companies. With more than 80% of the companies already declaring results, the picture is fast emerging. Overall sales revenues are up by over 30% on a yoy basis. Although volumes have struggled to grow across key sectors like autos and FMCG, many other sectors have managed to grow volumes and also get better pricing. But, the real story lies in the net profits and the gross profits. Let us look at the gross profits first.

Despite pricing pressures for most companies, the gross profits of Indian companies that have reported numbers have grown by nearly 30%. That is largely due to lower input costs and better cost control mechanisms initiated proactively by the larger companies. One concern is that the interest cost for the quarter is up by nearly 25% and that can be attributed to the higher cost of funds for banks and financial companies. However, with banks moving to external benchmarking from October and RBI still holding a dovish stance, this should taper.

On the net profits  front, if you exclude the telecom impact, the net profits are up actually by 40% on a yoy basis and 20%  on a qoq basis. While cost cutting at an operational level has made a difference, a larger part of the interest cost has been compensated by the lower tax burden. That is because most companies have opted to shift to the new tax formula where they forego exemptions and pay the concessional tax rate of (22% + cess + surcharge). This has given them benefits on the deferred tax front and that has helped in reducing the tax burden substantially. In fact, the overall tax payment by Indian companies in the second quarter is down by 19% on a yoy basis and 28% on a qoq basis.

Sectors that did well in second quarter
A surprising outperformer in the second quarter were the cement companies. Most cement companies have consistently managed better volumes and price realisations during the second quarter. At the same time, some rigorous cost control measures have also worked very well in the recent past. That is evident in the numbers. If you look at the cement and other construction material companies, sales revenues were up by 32% while profits were up by a whopping 135%. Interestingly, FMCG companies saw tepid sales growth of mere around 7% for the second quarter but more than made up with 27% growth in profits. While volumes (especially rural volumes) continue to be thin, the profits came from better cost controls, lower crude oil prices, cheaper input costs and selling cost rationalization.
Among the other outperformers, healthcare companies saw 11% rise in revenues and 66% rise in profits. This was largely driven by large hospitals completing their capital investment cycle. Software and IT services saw a 7% growth in revenues and a 9% growth in profits. This may not look too flattering but considering their huge base, this has kept markets buoyant.

Sectors that disappointed in Q2
Despite the profit disappointment, the telecom sector overall saw revenue growth of 11%, but we shall leave this sector aside for the time being. No prizes for guessing, but the big hit was the automobile and auto ancillary sector. Revenues for the sector were down by 23% and profits were down by 43%. It was a combination of weak sales, limited consumer demand and aggressive discounting by auto companies. Also, frequent shutdown in plants to match demand are resulting in unabsorbed fixed costs. Capital goods were another disappointment with 13% fall in sales and 66% fall in profits. That is evident from the negative capital cycle in the IIP numbers.

In a nutshell, Q2 has redeemed itself on the profit front due to cost controls and tax saving. The coming quarters could be a lot more challenging.

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