Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now

You can switch off notifications anytime using browser settings.
Stock Analysis, IPO, Mutual Funds, Bonds & More

Q3 corporate profit growth spurts due to low base effect

The aggregate revenue and net profit of 1,078 companies that have declared results so far, have gone up 13% and 27%, respectively, year-on-year.

, ET Bureau|
Feb 12, 2018, 06.30 AM IST
Getty Images
Since companies with good results usually show their report cards first, the earnings growth of the remaining companies is likely to lower.
The stock market has rallied in the past few years based on the expectation of an impending earnings revival.

The revival, hampered by demonetisation and problem-riddled GST rollout, among other things, seemed to be getting postponed indefinitely.

However, finally, earnings have begun growing in line with Street expectations. “Due to the low base effect, the earnings expectations for the third quarter were high and the results, so far, have been in line with the high expectations,” says Vinod Nair, Head, Fundamental Research, Geojit Financial Services. Pankaj Pandey, Head, Research, ICICI Direct concurs: “We have not seen any major disappointment in this results season, so far.”

Profits grow even as expenses rise

The aggregate revenue and net profit of 1,078 companies that have declared results so far, have gone up 13% and 27%, respectively, year-on-year. The earnings revival is also visible in the recent jump in Sensex EPS. But investors should not assume that the results season will end with an aggregate 27% earnings growth. Since companies with good results usually show their report cards first, the earnings growth of the remaining companies is likely to lower.

Sensex earnings per share rose 10%

This will pull down the aggregate earnings growth and investors need to moderate their growth expectation for the third quarter to a more reasonable level of 15%-20%. It is important to keep in mind that low base is the main reason behind the earnings revival—the poor corporate numbers during the third quarter of 2016, due to the demonetisation, account for the high y-o-y earnings growth in the third quarter of 2017.

Since the impact of demonetisation spilled over to the fourth quarter of 2017, y-o-y growth in the fourth quarter of 2018 too will be on the higher side. “Since the earnings pickup is strong, we may see a decent earnings growth in the fourth quarter of 2017-18 as well,” says Anand Shah, Deputy CEO and CIO, BNP Paribas Mutual Fund. Revival in global commodity prices is another factor supporting the earnings growth. The steel sector has seen the maximum jump in earnings, mostly because of the very low growth during the same period last year.

Sectors with highest growth in earnings

Sectors with lowest growth in earnings

Note: Value in brackets denotes companies that have reported results. *losses have increased from Rs 827 cr to Rs 1,315 cr.
Source: ETIG database

Revival in global commodity prices is also helping other sectors including oil and gas, zinc, iron ore, coal, etc. This is indirectly helping the banking sector as well. “Fall in commodity prices and the nonperforming asset (NPA) issues of banks were the two major factors preventing an earnings revival. Since a major portion of the NPA troubles are linked to commodity producers, banks’ NPA provisioning will start coming down as their health improves,” says Shah.

However, the pressure of NPAs on public sector banks and old generation private sector banks is still quite severe and their aggregate net profit fell 21% in the third quarter. Telecom, mostly due to the aggressiveness of the new entrant, Reliance Jio, is another sector that continues to bleed—its sector’s combined y-o-y net loss during the quarter ballooned from Rs 827 crore to Rs 1,315 crore. Since telecom sector’s average revenue per user (ARPU) is still falling,the NPA pressure from this sector on banks may take a few more quarters to stabilise. Though telecom companies are bleeding, allied industries such as telecom equipment manufacturers and cable manufacturers are benefitting from the cut-throat competition in the sector, registering net profit growth of 19% and 82% respectively.

Experts say the earnings revival will continue into the next financial year as well. “Since the impact of increased government spending will take effect in the next financial year, numbers for all quarters of 2018-19 are expected to be good,” says Shah. Pandey of ICICI Direct is more optimistic: “According to our estimates, earnings should see a 17.5% CAGR for the next two years.” Besides the domestic recovery, the turnaround in global commodity prices will support the growth revival. Though it will be inflationary, the impact will be positive in the beginning. “Corporate earnings and equities usually benefit in the first phase of inflation because it gives companies pricing power and there will be re-pricing of existing stocks as well,” says Shah.

“The recent uptick in wholesale price inflation is because companies have been able to increase prices. With increase in volume and price, margin and net profit will improve,” says Nair. However, the inflation may start hurting companies later—mostly in 2019-20—because RBI will start taking steps, such as hiking interest rates, to rein in inflation. “Highly leveraged companies will have some issues in the future due to the increase in bank lending rates,” says Shah. After the initial phase of price increase, companies will also find it difficult to pass on the increased cost, impacting their margins in 2019-20.

Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links

Follow us on

Download et app

Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service