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Transition to GST takes a toll on Q1 results: Analysis

LiveMint logoLiveMint 15-08-2017 Nasrin Sultana

Mumbai: June quarter sales and profit growth of listed companies were hit by the transition to goods and services tax (GST), a Mint analysis shows. This has prompted analysts to continue cutting earnings estimates for the current fiscal and the next, thus making stock valuations look more expensive.

According to data compiled from Capitaline, June quarter net sales growth of 1,671 BSE-listed companies slipped to a three-quarter low of 4.51% as distributors and retailers stopped stocking goods and liquidated inventory ahead of the GST implementation on 1 July.

Similarly, net profit growth after adjusting for one-time items fell to a six-quarter low. It shrank 3.89% in June, compared with a year ago. This sample set excludes banks, financial services firms and energy companies as they follow a different earnings model.

“Last quarter earnings were hit by a combination of factors. Though GST disrupted business, there were a few other sector-specific issues specifically in information technology (IT) and pharmaceuticals which impacted overall growth in Q1,” said Navneet Munot, chief investment officer at SBI Mutual Fund.

He also added that a further appreciation of the rupee—which has gained 6% against the dollar this year—may extend the pain of companies that earn much of their revenue in dollars.

That the pain to earnings is likely to sustain can be seen from the continuing earnings downgrades.

Data from Bloomberg show Nifty companies’ consensus earnings per share forecast for the current fiscal has fallen 7.23% since April; for fiscal 2018-19, it has been cut by 3.43%.

For the 50 members of the Nifty index, adjusted net profit fell to a four-quarter low, shrinking 0.84% year-on-year. The Nifty currently trades at 19.6 times 12 months forward earnings, making it one of the most expensive benchmark gauges.

“Besides GST, a global slowdown and forex losses made a deep impact on business,” said Siddhartha Khemka, head, equity research (wealth) at Centrum Broking Ltd.

The slowdown in growth has happened despite a fall in costs.

For the 1,671 company set, raw material costs declined 6.2% helped by the falling prices of inputs such as crude oil. Brent crude prices dropped 10.7% in 2017. Similarly, employee expenses fell by 4.39%.

Still, investors would take heart from the fact that operating profit margins rose to 18.78% against 17.4% in the March quarter.

Secondly, interest costs grew slower than operating profits, and that meant the debt servicing capability of this set of firms improved a bit. The interest coverage ratio was 3.18 for the June quarter against 3.0 in the three months to March.

Some analysts such as Mayuresh Joshi, a fund manager at Angel Broking Ltd, expect an earnings recovery towards the second half of this fiscal.

“Management commentaries after the first quarter have indicated business is stabilizing post transition to GST, and companies are confident of volume growth recovery in forthcoming quarters. Also, a well spread out monsoon and festivals will see a revival in consumer demand,” said Joshi.

Munot of SBI also said that “valuations are reflecting expectations of earnings recovery”.

The Sensex and the Nifty have gained nearly 19% this year, fuelled by liquidity inflows and hope of more reforms propping economic growth. Analysts see tepid company earnings growth and risks to overall economic growth such as the threat of deflation flagged by the mid-term economic survey as key threats to the stocks rally.

nasrin.s@livemint.com

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