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BOTTOMLINE: Is the seemingly positive trend in Q2 earnings performance for real?

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Early bird numbers suggest a clear recovery in business since June, but the year-on-year growth numbers could be misleading

BOTTOMLINE: Is the seemingly positive trend in Q2 earnings performance for real?
One swallow doesn’t make a summer. That’s important to keep in mind when trying to project trends based on early bird numbers. The performance of companies that have reported second-quarter earnings so far, have been mostly ahead of analyst expectations.  And while some have even cited positive year-on-year comparisons, such assessments need to be taken with pinches of salt.
We examined the performance of 133 companies in the BSE-500 list for an early indication of a possible trend. Here’s what we found:
Key Financials (% Growth)QoQYoY
Total Operating Income232.23
Other Income-20.350.56
Interest-4.1-1.11
Provisions & Contingencies-3.9-8.62
Depreciation2.88.56
PBT73.497.02
Equity1.513.17
Reserves0.1-0.62
Networth0.42.15
The quarter-on-quarter growth has been a healthy 23 percent--note you have the big IT players, banks, insurers, and FMCG companies dominating the early declarers. The profit before tax (PBT) is also up a healthy 73 percent, with lower interest costs and provisions (mostly for the financials) contributing. Other income, though, dipped as more money could have been put to productive use as normalcy is returning to business.
Year-on-year, the 2-odd percent income growth looks positive, but there are a few wrinkles there that we’ll get to. PBT is also up a healthy 97 percent, aided by a sharp 50 percent jump in other income and lower provisions.
Here it is interesting to note that the equity capital of the companies has expanded 13 percent year-on-year following the spate of fundraises, and this has helped absorb the losses in the first quarter, which saw reserves shrink by 12 percent from the March quarter. This has helped the year-on-year networth picture improve to a 2 percent growth. Which too is a tad misleading because September 2019 saw a 7 percent degrowth in networth for these companies.
In fact, the previous year’s quarterly trend is an important aspect to consider while evaluating the performance.
The Base Effet
In September 2019, we were in a slowdown. GDP growth in the July-September quarter had slid to a 6-year low of 4.5 percent from 7.1 percent a year ago, and the Gross Value Added (GVA) growth was down to 4.3 percent from 6.9 percent a year ago. The Index of Industrial Production (IIP) had turned negative for the second quarter, with September logging minus 4.6 percent. Auto sales too had slumped. Passenger vehicle sales were down 24 percent in the quarter, commercial vehicle sales had slid 23 percent and two-wheeler sales were 17 percent lower.
So, a year-on-year evaluation with the September quarter last year isn’t the most aspiring base to work with. In fact, given the slowdown in growth in the second half of last fiscal, the numbers in the second half this year could look much better as the GVA growth was down to just 3 percent in the fourth quarter last year, with manufacturing and construction seeing degrowth.
Real Gross Value Added (Y-o-Y % change)
Jun-20Sep-20Dec-20Mar-21
GVA4.84.33.53.0
  Agriculture3.03.53.65.9
  Mining4.7-1.12.25.2
  Manufacturing3.0-0.6-0.8-1.4
  Electricity8.83.9-0.74.5
  Construction5.22.60.0-2.2
  Hotels, trade, transp. serv, etc3.54.14.32.6
  Real estate, finance serv, etc6.06.03.32.4
  Public & social serv.7.710.910.910.1
More Numbers Shift Trend
The other point to consider is that early bird numbers may not make the trend. To examine this aspect, we evaluated the performance of our early bird companies with the complete BSE-500 set in the preceding quarters. Here’s what we found:
EARLY BIRDS VS BSE-500
Growth QoQ (%)Q1Q4
Operating Income
Early Birds-19-1.4
BSE-500-22.7-2.8
PBT
Early Birds4.5-41.5
BSE-500102.4-78.6
In June and March-ended quarters, income for the early birds and BSE-500 companies declined mostly in-line with estimates. However, the early birds showed a lesser decline in profits in the March quarter and a more muted growth in June than the broader set of companies. If this trend is to continue in the September quarter, the late reporters may actually outdo the early birds on profitability. Or will we learn that the early birds joined the party late—are making up for underperformance in the June quarter? We’ll know soon enough.
What's clear is that there is a recovery visible, and this will likely work more in favour of the large listed companies and against the less resilient, numerous MSMEs. So growth is back, supported by a weak base year-on-year, but what will be key to track is a quarter-on-quarter improvement in the next two quarters. Only then will we be more certain about the strength of the recovery. Here the festive season sales can help. But will the “pent-up” demand start to fizzle post the festive season? Will India see a second wave of Covid and a tightening of unlock rules? Those are the big questions.
For now, the early bird numbers should be seen as green shoots at best.
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