MUMBAI: The newly implemented labour code, which makes it mandatory for employers to increase the basic salaries to 50% of overall the cost to company (CTC) pushing up gratuity costs, has shaved 5% off the bottom line of India Inc in the December quarter.
“The new labour codes, notified form November last, make it mandatory for basic salaries to be raised to 50% of overall CTC, pushing up gratuity costs for many companies. Our data compilation shows a 5% hit to overall net income this quarter for BSE-500 companies, with technology companies taking the biggest hit at 13%, and discretionary, at 6.5%, being the other notable sector.
“This is a one-off, non-cash charge and has artificially distorted reported earnings. It has also depressed the surprise ratio, the share of negative surprises fell from 47% to 27% for Nifty if we adjust for the labor code impact,” Emkay Global analysts Seshadri Sen, Mayank Sahu and Samruddhi Athanikar said in a report Tuesday.
“Despite the labor code hit, overall earnings remained robust. BSE-500 reported a 16% on-year PAT growth, with energy (40%) and discretionary (26%) the key drivers. Technology was the biggest laggard at 7%. On the other hand, Nifty 50 earnings were much weaker at 8% (14% adjusted for the labor code hit),” they said.
Operating margin for BSE-500 dropped by 35 bps sequentially, though. However, topline growth touched double digits for the first time in the past eight quarters, led by a sharp recovery in consumption.
The profit growth distribution was also robust with the share of companies delivering over 25% net income growth inching up slightly to 37% in Q3 from 35% in Q2, while the share of negative growth companies dropped sharply from 33% to 26%. Overall, the quarter sent out strong signs of a consumption-led earnings growth recovery, they said.
These companies have also reported robust revenue growth or net sales growth which printed in at 11.3% in the quarter, up from 8.6% in Q2 and 5.7% in Q1 and a pale 6.1% in the year-ago period, while their operating profit clipped higher at 14.1%, down from 20.8% in Q2 and 13% in Q1 and -0.6% in Q2FY25 while operating margins improved to 16.3%, 16.7%, 16.7% and 15.6% respectively.
They see healthy signs of a consumption recovery, with revenue growth accelerating from 16% to 20% sequentially in Q3, the first quarter after the GST cut. Autos were the key driver with strong growth expansion (14% to 21%), but staples remained weak with growth flat at 13%.
Accordingly the brokerage is bullish on equities and has raised its Nifty target to 29,000 by December as they see the soon to be finalized trade deal with the US being an inflection point for the markets.