ET Intelligence Group: India Inc registered a strong double-digit, year-on-year growth in aggregate net profit for the second straight quarter, primarily helped by cost optimisation and partly by festive demand as the economy revived. A majority of the companies continued to beat street expectations in the December quarter. In addition, management commentaries reflected the upbeat growth scenario.
A sample of 3,087 companies reported 68.7% year-on-year growth in net profit for the October-December 2020 period, the strongest in nine quarters. This was largely on account of better cost control by companies as revenue grew by a modest 1.8%. The cost-optimisation measures also expanded the sample’s operating margin by 270 basis points to 19.8% for the December quarter. A basis point is 0.01 percentage point.
“The ebitda margins were largely ahead of expectations driven by cost savings, including lower ad spends, improving operating leverage and product mix in some cases. However, there were clear signs of rising input costs,” said Vinod Karki, strategy head, ICICI Securities.
The sample’s revenue grew after a gap of three quarters though it was skewed by the 16% fall in the revenue of the oil and gas sector, led by a 21% drop in the operating revenue of Reliance Industries Ltd. After excluding the oil and gas sector, the sample’s revenue grew 7.1% and profit was up 74.2%. Also, the operating margin increased 250 basis points to 22.4%. The oil and gas sector contributed 18.6% and 13.5% to the sample’s revenue and net profit, respectively.
“The third-quarter numbers seem to be the best in a decade. Cost-saving initiatives, restocking demand and the festival season demand also helped companies to post a strong quarterly tally,” said Deepak Jasani, retail research head, HDFC Securities.
Apart from showing strong sales and profit growth, several debt-laden companies used better cash flows to improve balance sheet strength. “The December quarter has maintained the momentum of big beats and upgrades. A key highlight has been the continuous trend of deleveraging. Several big corporates including Ultratech, JSPL, Hindalco, and Tata Steel reduced their leverage consistently in the nine months to December 2020,” said Gautam Duggad, research head, Motilal Oswal Institutional Equities.
On the sectoral front, some of the consumer-focused and commodity-related sectors performed well during the quarter. “IT, auto, banks, cement, metals, and infra sectors have reported good numbers while pharma and oil and gas numbers have been unexceptional,” said Jasani.
Karki of ICICI Securities pointed out that consumer discretionary sectors including aviation, tourism and retail continued to contract. “Also some of the engineering and capital goods stocks results were below estimates,” he added.