Q3FY15 Result Review and Picks 2 :: HDFC Sec

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The quarter gone by: Net sales of Indian companies expanded at the slowest pace in four quarters in the three months ended 31 December, illustrating the challenges local companies are facing as the economy takes longer than expected to recover from a growth slump. Lower raw material costs because of a global slump in commodity prices, however, boosted operating profits, providing the only silver lining in the otherwise dismal scenario. Numbers (earnings and sales) have been disappointing, and have turned out to be a lot worse than consensus expectations. Q3FY15 has dashed all hopes of India Inc which was counting on a strong comeback. If the quarterly performances of Nifty 50 companies are any indication, the turnaround in their fortunes may take some more time. India Inc’s annual profit growth in the three-month period ended December 2014 has been the worst in five quarters, with the aggregate net profit of 2,941 companies declining 16.9 per cent. Even after adjusting for one-offs (extraordinary transactions), it has been 6.3 per cent lower than a year ago. These companies’ sales growth has been the weakest in at least 12 quarters. Q3FY15 numbers were disappointing for most sectors in India Inc, barring IT, media, and metals. However, given the fact that macro-economic factors are favourable and the reform process is steady, expectations of improvement have been keeping the markets buoyant. Operating profit margins of 1,992 manufacturing companies were down 100 basis points on a year-on-year basis and 140 basis points sequentially, largely due to a decline in sales and a rise in employee and power & fuel expenses. A CARE study of the performance of 2,934 companies showed that net sales declined by -0.2% in Q3FY15 as against 6.5% increase in the previous year while net profits declined significantly by 28.3% over a positive growth of 2.5% last year. The lower growth in sales volumes could be largely attributed to the weakness in the global and domestic demand conditions. Also despite the softening inflation in the past few months the gains from the same remain invisible indicated by the declining profitability. The large sized firms have performed relatively better with positive growth in sales and increased profitability when compared with the smaller ones. The smaller sized firms continue to underperform incurring huge losses and lower sales. It is not that companies have not benefitted from lower input prices but the gains have been lower than expected. For the 1,992 manufacturing companies, the aggregate cost of goods sold has fallen eight per cent annually and 3.7 per cent sequentially - much more than the sales decline of 3.3 per cent and 2.5 per cent, respectively. But the full benefits of the price decline have not come in the December quarter. These could be more visible from the March quarter onwards. Even as sales and PBIDT (profit before interest, depreciation and tax) of the manufacturing companies has declined, interest costs and depreciation have increased by seven-eight per cent each. For the Sensex companies, the reported net profit has on a year-on-year basis declined 6.5 per cent — the weakest show in six quarters — on a 2.2 per cent decline in sales, the weakest growth since March 2009. The profits of at least 17 Sensex companies were lower than Bloomberg’s consensus estimates. Q3FY15 adjusted net profits of the BSE-30 Index and Nifty-50 Index declined 5.8% and 5.1% yoy. On the positive side, Sensex companies that have beaten estimates include Maruti, NTPC, Bajaj Auto, Bharti Airtel, M&M, Tata Power, Infosys and Sesa Sterlite. Hindustan Unilever has exceeded the estimates too, but that has largely been due to exceptional income. Net profits of BSE-30 companies declined for the first time since Q1FY14 led by the automobiles, banking, energy and industrials sectors. Banks’ slippages and NPLs remained high, volume growth was patchy across all domestic sectors and order booking of industrial companies showed no improvement. Q3FY15 net profits benefited from a weaker exchange rate on a yoy basis. The average Re/US$ exchange rate was 61.9/US$ in Q3FY15 versus 55.9/US$ in Q3FY14 and 60.6/US$ in Q2FY15. India Inc posted dismal earnings for the quarter, with three sectors -- oil & gas, metals and capital goods -- dragging the overall growth into the negative space. Companies in oil & gas and metal sectors posted a negative net profit growth of over 28%, while capital goods' companies fell 25.8% year on year.

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