Corporate profits

Decline in corporate profits continues in first quarter of 2017-18 due to GST

Another season of quarterly results ended with lackluster numbers from India Inc. Aggregate net income of 2,418 companies fell 8.63% in the first quarter of 2017-18, compared to the same period a year. latest. Destocking before the introduction of the goods and services tax (GST) is the main reason for the low figures. This was also reflected in the Industrial Production Index (IIP) which fell 0.1% from June 2016, contracting for the first time in 48 months. Compared with May, the IIP was down 1%.

However, as the market was expecting a bad run of numbers for this quarter, it did not react negatively. Some industries, however, have belied Street’s expectations. “Overall, the first quarter results are in line with overall estimates. While private sector finance companies focused on retail and cement offered a positive surprise, pharmaceuticals were worse than expected, ”said Gopal Agrawal, CIO, Equity, Tata Mutual Fund.

WHAT THE FUTURE RESERVES

So when will things get better? Market participants have started asking this question more frequently because the market has already rallied in expecting an early rebound in growth. Problems with the implementation of the GST also spilled over into the second quarter. However, experts say it is transient in nature and investors need not worry. “Although data such as the Purchasing Managers Index (PMI) weakened significantly in July due to issues with GST implementation, the impact is expected to be transient,” says Aayushi Kukreja, economist, Morgan Stanley Research. Agrawal of Tata Mutual Fund agrees: “The GST issues started to be resolved from around mid-July, so the negative impact will only last until the first few weeks of the current quarter. . ”

While the immediate issues will soon be resolved, the lingering impact of the GST disruption will continue for some time to come. This is why the government is no longer confident of reaching the upper end of its GDP growth estimate (6.75-7.5%) for 2017-18, shown in the economic survey. “Disruptions in economic activity were expected due to the new tax regime and the economy would take some time to return to full capacity,” said Anis Chakravarty, chief economist, Deloitte. Phani Shekhar, Fund Manager, PMS, Karvy Capital agrees: “Don’t expect any significant improvement in corporate numbers in this fiscal year. ”

Although the overall numbers are expected to remain weak, sector performance, just like the first quarter, will also vary in the coming quarters. “Sectors such as telecommunications and banking will also continue to struggle over the next few quarters,” Shekhar said. The aggregate net profit of the telecommunications services industry fell 395% due to the attack on Reliance Jio. The fierce competition in telecommunications continues and it may be a few more quarters before things set in. Business-focused public sector financial firms such as SBI are still under pressure due to the increase in their non-performing assets (NPAs). As the financial segment’s contribution to the market is significant, the overall profit recovery is only possible if this sector comes out of the woods. “Two major exporting sectors, IT and pharmaceuticals, are not doing well at the moment,” Shekhar emphasizes. In addition to growing concerns over IT and pharmacy, the appreciation of the rupee is another factor that is hurting them.

The telecoms sector weighs on its profits

Growth is also expected to remain subdued in the second quarter.


Based on 2,418 companies. Compiled by the ETIG database.

Base metals is a segment that should improve its performance over the next few quarters. “Base metal prices have started to rise, so companies in these sectors could post good numbers in the second quarter,” Agrawal said. Base metals, especially non-ferrous metals like aluminum, nickel, copper, zinc, etc. have recently recovered due to production restrictions imposed by China. Following the crackdown on environmental offenses, these restrictions removed excess production from the market.

COMPANIES HOLD CAPEX

Sustained economic growth is only possible when the demand for investment increases, and for this companies must start investing in new factories. Experts believe that the recovery in investment demand will not happen anytime soon. “It will take at least another year for investment demand to pick up,” Agrawal says. Low capacity utilization is the main reason companies have maintained capital spending. They won’t implement new capabilities until usage levels improve. “In addition to low capacity utilization, the unavailability of credit is another problem,” Shekhar explains. Although the banking system is overflowing with liquidity due to deposits as a result of demonetization, banks are unable to lend to large projects due to their NPA issues.

WHAT SHOULD INVESTORS DO?

Investors should be careful as the market is resisting higher levels, despite weak corporate figures. And the valuation continues to be at high levels despite the recent correction. While the Sensex PE (Price Equity Ratio) is placed at 23.48, Nifty is trading at a PE of 25.28. “Investors should stick with market leaders and not try to dig deep,” Shekhar says.


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