Q3FY16 Results Review :: HDFC Sec

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The quarter gone by: Another result season has come and gone without any sign of economic revival. Further most investors are not very hopeful about a turnaround anytime soon and expect a cut to the consensus EPS estimate for 2016-17 (current estimate 18% growth compared to 2015-16). India Inc and equity investors might have to wait longer for a recovery in corporate growth and earnings. During the October-December quarter of this financial year, the combined net sales of 2,561 companies declined 4.4 per cent on a year-on-year basis, a higher rate than 4.3 per cent in the September quarter and 3.6 per cent in the June quarter. A fall in demand due to the ongoing economic slowdown was the primary reason. Fall in product prices, especially of commodity companies, only added to the topline contraction. Operating profit rose 1.1 per cent, aided by lower costs amid a slide in global commodity and energy prices, while net profit declined 1.7 per cent. If financial and energy firms are removed from the sample, the picture improves a little. The remaining 2,100 companies reported net profit growth of 3.3 per cent from a year earlier, on lower tax outgo, while net sales remained stagnant, rising only 0.7 per cent on a year-on-year basis. Raw material and energy intensity declined to the lowest in four years and companies continued to make gains from record low prices of industrial commodities and energy. As a result, the operating profit margin (excluding other income) increased 20 basis points from a year earlier, and 60 basis points from the previous quarter, to stand at 14.3 per cent of net sales. The profitability would have been higher if not for employee expenses and other costs, which seemed to be eating into the gains from lower input costs. The total employee costs of these companies grew 8.6 per cent during the quarter, compared with 8.1 per cent in the corresponding quarter the previous year. Q3FY16 was another quarter of gross margin expansion across sectors YoY as companies realised benefits from a global fall in commodity prices viz. crude & crude derivatives, metals - ferrous & non ferrous, rubber and cotton. The fall in crude price benefited the airlines & lubricants industry immensely while the consequent fall in crude derivatives benefited the paints sector (majority of raw materials are crude derivatives). The fall in metal prices acted as a shot in the arm for auto & auto ancillaries as well as consumer durables that witnessed a strong gross margin expansion albeit muted volume growth. While a fall in agri commodity prices like cereals aided the FMCG sector, rubber aided the tyre sector while cotton aided the textiles sector. Most companies witnessed a flow of gross margin expansion to operating margins. However, the extent was somewhat limited as some had to pass on the raw material benefits to its end customers while others had to increase advertisement & promotional expense to push their products in the marketplace. The bottom line was also aided by a sharp decline in direct tax outgo during the quarter, as companies in many sectors paid lower corporate income tax or claimed refunds due to a progressive deterioration in profitability. Combined tax outgo for the companies in the sample was down ~13 per cent on a year-on-year basis, leading to a 330-basis-point decline in the effective tax rate from a year earlier. On the brighter side, the numbers for the December quarter also suggest that some deleveraging is taking place, with interest expenses growing at the slowest pace in at least three years. The combined interest outgo was up only four per cent on a year-on-year basis, down from 9.6 per cent a year earlier and six per cent in the previous quarter. This could be due to a combination of declining working capital borrowings and a deflationary impact on the top line. Among key sectors, power, software services, pharmaceuticals and automobile were the biggest contributors to corporate profitability and growth during the quarter. The biggest laggards were metals & mining, PSU banks, construction, infrastructure and capital goods players. Sectorally, energy companies, which saw the fastest profit growth drove profit growth. PSU Oil marketing companies such as IOC and HPCL, which reported losses in the year-ago quarter, led the strong growth in the energy sector’s profits. The healthcare sector also saw strong growth in profits. At the other end, financials, profits of which declined, dragged profit growth. This was largely due to increased provisioning by PSU banks. Telecom and materials were the other sectors that registered a YoY decline in profits. Most other sectors registered single-digit profit growth.

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http://hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3016621