In Q2, India Inc shrugs off GST impact

After its muted performance in the June quarter due to the transition to GST, India Inc is getting back to form, going by the September quarter results of 700-odd companies.

Net profit (adjusted) for these companies grew 13.45 per cent in the three months ended September 2017, over the September 2016 quarter (year-on-year). The disruptions caused in the run-up to GST resulted in only 1.08 per cent year-on-year growth in net profit for these companies in the June 2017 quarter.

Restocking of inventory post GST as well as the onset of the festival season helped consumer-oriented sectors such as apparel, durables, auto, gems and jewellery deliver much higher profit growth than in the previous quarter.

Improving rural sentiments thanks to a good monsoon and higher MSPs also saw agrochemical companies emerge on top. Refineries, too, did well, backed by better refining margins and inventory gains from rising crude oil prices.

Select companies in the real estate, infrastructure and metals space also put up a good bottom-line show.

Banking and finance companies have been excluded for this analysis. Consolidated results have been considered wherever applicable.

The double-digit profit growth of 13.45 per cent has been achieved despite the mere 4.5 per cent growth in other income (from non-operational activities such as interest income) and a 10-15 per cent spike each in interest, depreciation and tax expenses.

This implies that the profit growth has been backed by a strong show at the operating level. Operating profits grew 15.55 per cent year-on-year.

In contrast, the June quarter saw 40 per cent growth in other income propping up net profit after operating profit slipped by about 1 per cent year-on-year.

Operating profit has been supported by improved demand/volumes. Net sales for the quarter for these 700-odd companies grew by 11.65 per cent year-on-year. While sectors such as IT and pharma continued to face headwinds this quarter, too, consumer sectors such as auto and FMCG saw a rebound in volumes after the lull due to GST in the previous quarter.

Godrej Consumer Products, for instance, reported domestic volume growth (year-on-year) of 10 per cent in this quarter, after recording just 0.1 per cent growth in April-June 2017.

Dabur’s domestic volumes moved up by 7.2 per cent as against a slippage of 4.4 per cent in the June quarter. Hero MotoCorp’s volumes grew 11 per cent, higher than the 6.2 per cent in three months ended June 2017. Aggregate net sales growth could probably have been higher than 11.65 per cent, but for the impact of GST accounting changes for a few companies.

Cost control measures have also played a part in boosting margins and profits. Given that many raw materials such as lead, steel, aluminium, crude oil, etc., have seen a rise in prices over the last year, input costs as a percentage of sales came in at 51.5 per cent for the quarter, about 1.5 percentage points higher than a year ago.

International lead prices, for instance, have moved up by about 20 per cent in the last one year. Thus, battery maker Exide Industries has seen its operating margins dip to 10.7 per cent from 15 per cent in the September 2016 quarter.

Although rubber prices have stabilised in recent months, tyremaker Apollo Tyres saw margins shrink by 4 percentage points this quarter as rubber still remained costly, compared with last year’s prices. Yet, overall operating margins for the 700-odd companies improved to 16.9 per cent from 16.3 per cent in the year-ago period, buoyed by cost-control efforts.

For instance, advertising and promotion spends as a percentage of sales came down for companies such as Emami and Colgate-Palmolive compared with the September 2016 quarter. This helped margin expansion for these companies. Many companies in sectors such as media, telecom, IT-hardware saw employee expenses coming down.

Thus, with both topline and bottomline growing in double digits, the results so far suggest that India Inc is all set to move into fourth gear in the second half of this fiscal year. However, for a more accurate picture, the results warrant a re-look once all the numbers are out.