Destocking, discounts ahead of GST rollout hurt June quarter earnings

MUMBAI: Indian companies reported a decline in June quarter earnings as distributors and retailers stopped stocking goods and liquidated inventory, sometimes at a discount, ahead of the implementation of the goods and services tax (GST) on 1 July

The June quarter profits and sales of 221 BSE-listed companies, after adjustment for one-time items, was the lowest in at least 14 quarters for which comparable figures were available, according to data compiled by database provider Capitaline. Net sales of these firms rose 2.57% in the three months ended 30 June from a year earlier, while adjusted net profit fell 3.64%, the first drop in more than three years.

The review excludes banks, financial services firms and energy companies as they follow a different earnings model.

Dealers, stockists and distributors reduced inventories as consumers delayed purchases on expectations of getting better prices after the implementation of GST. “Business in the last quarter was hit due to destocking prior to implementation of GST

  

Also, most companies offered heavy discounts which have dented profits,” said Pramod Gubbi, head of equities at brokerage Ambit Capital. It is likely to impact earnings till the second quarter of fiscal 2018, according to Gubbi. GST, first mooted more than a decade ago, subsumes more than a dozen state and central levies into one tax, unifying India into a single market for the first time.

The biggest tax overhaul since Independence is aimed at expanding India’s tax base, making it easier for companies to do business and boost growth. But the initial challenges in implementation of the new indirect tax system means there will be some pain before any gain. Providing some relief to companies, interest costs for the 221 firms in the review fell 0.11% from a year earlier to the lowest in 10 quarters.

The companies’ interest coverage ratio (ICR) also improved during the June quarter. ICR measures how easily a firm can pay its interest expenses on outstanding debt. ICR for the June quarter was at 8.09, as against 8.58 in the preceding three months. Lower borrowing costs, however, failed to boost profitability because of a drop in sales.

“Auto, consumer durables, FMCG (fast-moving consumer goods) and cement companies were most hit due to uncertainty because of GST rollout which led to massive destocking. These companies started destocking from mid-May itself while discounts hurt margins,” said Atul Bhole, vice-president, investments, at DSP BlackRock Investment Managers.

In the June quarter, the net profit margin of the 221 companies contracted to a nine-quarter low at 10.99%, while operating profit margin narrowed to 23.47%. Bhole expects the impact of GST to fade away by the December quarter. Companies’ input costs fell in the June quarter. Raw material costs as a percentage of net sales was at 8.85% in the quarter ended 30 June from 12.29% in the preceding March quarter.

The Bloomberg Commodity Index fell 3.22% in the June quarter, while Brent crude slipped 9.84%. 

Source::: Live Mint, dated 31/07/2017.