During the third quarter, net profit of many large companies slipped for the fifth consecutive quarter, which is more prolonged than the Lehman crisis period, says Edelweiss Securities report
For the fifth consecutive quarter, which is more prolonged than the Lehman crises period, net profits of several companies, excluding oil-marketing companies (OMCs), slipped further. While top line (revenues) growth remained in contraction zone, earnings before interest, taxes, depreciation and amortisation (EBITDA) margins could be peaking out says Edelweiss Securities Ltd in a research report.
"During the third quarter (Q3) of FY2015-16, our coverage universe, excluding OMCs extended weakness of earlier quarters with revenues contracting 3% and EBITDA and PAT slipping 6% and 10%, respectively. The weakness was more pronounced in commodity sectors and banks due to Reserve Bank of India (RBI)’s directive and commodities). Other segments, such as IT, pharma and auto exports also reported sub-10% growth in net profit of profit after tax (PAT) for the fourth consecutive quarter – most prolonged in a decade," it said.
According to Edelweiss report, low capex seems to be hurting domestic investment earnings, but utilities earnings growth was encouraging. It said, "Domestic consumption seems to be the only relatively bright spot, though earnings could slow as benefits of lower input prices start receding going ahead."
Slowdown is seen in other segments too, Edelweiss said, adding, "While exports and domestic investment are plagued by weak demand, subdued prices in consumer goods are due to lower input prices. Private banks are the only ones posting about 20% and stable/ accelerating top-line growth."
EBITDA margins of Edelweiss' coverage came in at 19.0%, about 40 basis points (bps) lower on yearly basis. "While lower input prices are still aiding margins, they have stabilised on sequential basis. However, other expenses such as employee costs and share of sales have been rising and could partially be due to lower top-line growth. By sector, exports’ EBITDA margin fell the maximum (230bps, while domestic consumption and investment players saw EBITDA margin expand by 145bps and 60bps, respectively," it added.
According to the research note, growth in net profit for Edelweiss' coverage, fell 6% against an estimate of flat growth, a fifth straight quarter of drop, mainly affected by state-run banks, commodities and capital goods. "Domestic consumption profits slowed down, but remained healthy. Nifty earnings per share (EPS) downgrade momentum remains high, with a broad based cut in earnings. Banks, Tata Motors and metals account for half the earnings downgrades. Current estimates imply acceleration in FY17E earnings growth to 15-16% from 0% in FY16," the report concluded.