Indian companies return to profit post GST, outlook improves

Demand rises as wholesalers replenish depleted inventories

Indian companies such as Maruti Suzuki, Bharti Airtel and Hindustan Unilever reported upbeat earnings growth for the July-September period, reversing a year-long decline as consumption boomed and they ironed out supply kinks after the roll out of a nation-wide Goods and Services Tax.

The outlook is also improving, especially for companies that cater to rural demand, say analysts. Thanks to a healthy monsoon, incomes in rural, agricultural areas are expected to rise.

According to Edelweiss Securities, the combined second-quarter net profit of the 225 listed companies that the brokerage covers reversed to 6% growth from a 11% decline in the previous three months. Edelweiss attributed the performance mainly to restocking by wholesalers after GST was implemented on July 1.

Retailers trimmed stocks ahead of the tax, which combined several different levies, to avoid having to deal with two different prices for the same product.

“Finally, an in-line quarter with limited earnings downgrades,” Edelweiss said in its report. “After an extended disappointment…over the past three to four quarters, July-September came as a welcome relief, with the top-line and profits meeting expectations.”

Aside from product re-stocking, the early onset of the Indian festive season this year also strengthened demand, say analysts.

According to Motilal Oswal, the total earnings of companies in the Nifty, India’s broader index, grew in double-digits for the first time after six quarters. Excluding oil marketing companies, whose profits were hit by poor refining margins, the growth of 10.5% was the highest in 13 quarters, it added.

Consumer goods makers such as market leader Hindustan Unilever reported a surge in sales volumes in the second quarter, while automobile companies such as Maruti Suzuki and Tata Motors surprised with improved operating performance.

Although Motilal Oswal cut its Nifty earnings per share outlook by 1.2% for this fiscal year ending March, it raised it by 1% for next year. The brokerage expects companies such as two-wheeler makers Hero MotoCorp and BajajAuto, and cement producers like Ultratech Cement and Ambuja Cements to do well as higher farm incomes encourage purchases and construction.

Recent changes in GST rates have resulted in price cuts, which could further lift demand for consumer goods makers.

Hindustan Unilever, which makes a range of affordable everyday products including toothpaste and shampoo that are popular in rural areas, reported a better-than-expected second quarter net profit, as sales volumes rose 4%. Smaller rivals, including Godrej Consumer Products, reported a 12% increase in profit, while Emami, which makes skincare and healthcare products, reported a 50% jump in profit.

However, some other sectors had a mixed quarter as other factors came into play.

While metals companies continued to bulk up on profits given the sustained rally in global prices, most missed analysts’ expectations due to higher input costs and weak domestic demand.

Tata Steel’s second-quarter profit fell short of expectations due to subdued domestic sales. Mining giant Vedanta also missed expectations despite a 47% jump in profit.

The beleaguered telecommunications sector, which was roiled by cutthroat competition from billionaire Mukesh Ambani’s wireless venture Reliance Jio, reported a 11% decline in sales for the July-September period. Market leader Bharti Airtel reported a 77% slump in second-quarter profit. Still, the earnings beat expectations following the company’s strong performance in Africa.

Analysts expect pricing in the domestic telecom market to stabilize after six quarters of massive tariff wars and revenue erosion. “We see a semblance of stability in the pricing environment in the telecom sector with Reliance Jio taking a few corrective price actions,” Motilal Oswal said.

Not surprisingly, defensive sectors such as pharmaceuticals and information technology showed the impact of challenges in their export markets. While top Indian drug makers such as Sun Pharmaceutical Industries, Dr. Reddy’s Laboratories and Lupin reported better-than-expected second quarter profit due to cost controls, their business in the U.S. continued to decline due to price competition and increased consolidation among drug buyers.

Overall, the technology sector led by Tata Consultancy Services, Infosys and Wipro posted a modest 3.7% rise in profit, above analysts’ expectations of no growth, Motilal Oswal said.