GST rollout impacts September quarter earnings of BSE companies

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Mumbai: Earnings of Indian companies were muted in the September quarter as companies struggled to adjust to the new goods and services tax (GST). Rise in raw materials and employee cost also crimped profitability.

Net profit after adjustment for one-time items of 1,289 BSE companies declined by 3.54% in the fiscal-second quarter from a year earlier, faster than the 3.18% fall in the preceding three months.

Operating profit margin of these firms, however, widened marginally to 19.09% in the three months ended 30 September from 18.75% in the preceding three months.

Net sales rose 7.39% in the September quarter from a year ago from a growth of 4.47% in the preceding three months.

The earnings review excludes banks, financial services firms and oil and gas firms.

“The GST transition slowed sales momentum in the first few weeks of the quarter, but most corporates noticed a pickup towards September, possibly due to the early festive season. GST-related hiccups (de-stocking) have waned in staples, but have persisted for durables and electricals,” said Unmesh Kulkarni, managing director and senior adviser at Julius Baer Wealth Advisors (India).

Analysts said that earnings expectations were very low on back of supply-chain disruptions because of the GST implementation from 1 July.

“Impact on profits, if any, was majorly due to the difficulty in passing on the materials cost in these trying times,” said Arun Thukral, managing director and chief executive at Axis Securities. He added that GST had impacted volumes in early part of the implementation period but as companies adjusted to the new tax regime, the volumes are back to normal which is reflected in the quarterly earnings.

Raw material costs of these firms increased by 5.97% in the September quarter while employee cost spiked by 7.82% in the same period.

Brent crude, used as a raw material in most companies, saw a price rise of 8% this year so far.

Among sectors, auto, consumer durables and technology firms saw an improvement in adjusted net profit while telecom, capital goods, realty and healthcare sectors earnings were disappointing. However, some analysts are concerned about the rich valuation of stocks even as earnings downgrades continue. “Valuations are rich and India’s macro outlook has dimmed with likely higher current account deficit, gross fiscal deficit and inflation. Thus, it is imperative that earnings do not disappoint versus the street’s high expectations,” said Kotak Institutional Equities in a note on 15 November.

Bloomberg data shows Nifty firms’ consensus earnings per share forecast for the current fiscal has been cut by 9.06% since April and for next fiscal 2018-19 it has been slashed 4%. The 50-share Nifty now trades at 19.5 times 12-month forward earnings, making it one of the costliest benchmark gauges.

Although valuations look expensive, investors are willing to pump money into Indian equities due to the high returns markets have shown this year, said Pankaj Pandey, head of research at ICICI Securities Ltd.

Year to date, both Sensex and Nifty have rallied around 23%. In comparison, MSCI Emerging Markets jumped 29.7% and MSCI World was up 16%.

Foreign institutional investors (FII) have bought Indian shares worth $7.69 billion and domestic institutional investors have invested Rs 74,968 crore in Indian stocks.

Kulkarni expects FY18 Sensex earnings growth in the range of 8-10%, which may accelerate to more than 20% growth in the following fiscal year.

“We expect earnings to revive from second half of FY18 on the back of demand revival following good monsoon. The recent rationalization of GST tax rates would also help improve the demand pick-up. We expect mid-teen earnings growth over FY17-19 period with majority of gains coming in FY19 led by auto and auto ancillaries, FMCG, NBFCs and private banks, materials and resources and upstream oil and gas companies,” said Thukral.