Corporate earnings grew at a robust pace in the December quarter in a bright spot for the Indian economy that is seeking to ride out of the brutal effects of the pandemic.
Out-of-home consumption, festive demand and improved consumer sentiment, besides benefits of tight cost control led to better-than-expected earnings growth during the quarter.
A Mint analysis of 2,485 publicly-traded companies, which reported earnings for the three months ended December 31 showed that net profit after adjusting for one-time items grew at the fastest pace in at least 25-quarters, at 71.95% from a year earlier, according to data compiled by Capitaline. That compares with a 34.88% rise in the September quarter and a contraction of 12.93% in the December quarter of 2019.
The review excludes banks, financial services and insurance, and oil and gas companies as they follow a different revenue model.
During Q3FY21, net sales growth of these set of companies grew 7.07% from a year earlier—a seven-quarter high. This is a recovery from a 1.8% decline in the September quarter, and a 2.13% drop in the December quarter of FY20.
“Broadly, earnings across most sectors have been quite robust this quarter and have continued to surprise consensus estimates. Earnings for most metal stocks have been very strong backed by high realizations; within the construction sector, execution has almost normalized to pre-Covid levels and also saw very strong order inflows; this trend was also reflected in strong volume growth for the cement sector. Pent up demand drove volumes for discretionary stocks in Q2FY21, strong volume growth continued into Q3FY21 as well and the information technology sector continued to see strong deal wins,” said Amish Shah, India Equity Strategist, BofA Securities.
A buoyant festive season, pent-up demand, strong rural growth and consolidation in favour of organized players also helped overall-demand growth, he added.
Net profit margin of these firms expanded to 9.15% in the three months to December from 7.51% in the preceding quarter and 6.34% a year earlier.
Likewise, operating profit margin widened to 23.76% in Q3 from 22.53% in the preceding quarter and 19.98% in Q3FY20.
“The Q3FY21 earnings season has maintained the momentum of the second quarter results–continued big beats and upgrades, and upbeat corporate commentaries across sectors and companies,” said Gautam Duggad and Jayant Parasramka, analysts at Motilal Oswal Financial Services.
To be sure, analysts cautioned that some of the cost rationalization measures by companies are likely to reverse as the economy starts to open up. Rise in prices of major commodities is feared to hit gross margins.
Analysts expect companies to offset the impact through product price increases and cost-saving initiatives.
Prices of major commodities surged in the December quarter. Crude oil prices jumped 26.5%, while aluminium, copper and zinc rose 14-16%, increasing raw material costs for these companies.
“Rising commodity prices is a risk for volume growth and margins. Some sectors such as automobiles and consumer durables have already started to take price hikes to pass on the cost pressures from high commodity prices—its impact on volume growth would be a key factor to watch going ahead,” said Shah.
Shah added that earnings for Nifty companies is likely to rise 37% in FY22, upgraded from 33% in FY21 on the back of the positive earnings surprise seen for most sectors and stocks, and a growth-focused Union budget.
Though improvement in the overall economy has not been able to catch up with the fast-paced recovery in corporate earnings, analysts are optimistic that the budget proposals with a focus on capital expenditure and infrastructure investments will be beneficial, going ahead.