India Inc’s revenue growth slips in Q4, surge in demand may boost profit

ET Intelligence Group: India Inc reported deceleration in topline growth for the March 2019 quarter reflecting the impact of slowing demand across sectors amid tight liquidity, slowing discretionary consumption and sluggish rural demand. While industry trackers have ruled out a quick recovery given the rising fiscal deficit and the prolonged phase of low inflation, they expect a double-digit profit growth for FY20 led by a possible bounce in demand in the second-half of the fiscal.

A sample of 1,731 companies across 13 quarters excluding banks and finance companies reported a 12.1 per cent jump in net profit in the March 2019 quarter after a drop in the previous quarter and a 7.9 per cent fall in the corresponding quarter of the previous year. Revenue growth was at a six-quarter low of 9.1 per cent. Barring cement, IT, metals, and oil & gas, other sectors reported subdued numbers.

“Although the expectations were scaled down, the actual numbers still disappointed in most cases. Revenue growth came in at a sixquarter low. Some positive surprises from a few heavyweights will enable ending the season with a not so bad feel,” said Deepak Jasani, retail research head at HDFC Securities. Demand has been weak, which has impacted the purchasing power, he added.

Operating margin fell 120 basis points year-on-year to 13.4 per cent. “Margins are a mixed bag with sectors like cement showing strong margin improvement, while utilities and auto have had margin compression,” said Pradeep Kumar Kesavan, senior vice-president at Elara Capital.

According to Jasani of HDFC Securities, companies have been losing pricing power due to weak demand. “Price increases have been difficult for most companies due to sluggish demand. In the case of some sectors, operating leverage has worked in the reverse due to falling sales. Marketing and advertisement spends have been cut,” said Jasani of HDFC Securities.

The sector performance during the March quarter was a mixed bag with just a handful of sectors reporting encouraging performance. “On YoY basis, cement has had a great quarter with 48 per cent growth in their weighted PAT. This was above our expectation. Auto and metals had a bad quarter with weighted PAT declining (27 per cent) and (34.6 per cent) YoY, respectively,” said Kesavan.

While analysts are optimistic of a revival in earnings performance, it may take a few quarters.

“Given the prevailing economic conditions, challenges and emerging risks, a sudden and significant spurt in economic activity and investments is unlikely in FY20,” said ratings agency CARE in a recent report. Lower inflation in the past few months means it will be some time before the economy shows major signs of revival which in turn would delay earnings recovery.

CPI inflation was at a seven-year low of 3.4 per cent in FY19 on account of lower inflation in prices of food and other retail items, including clothing and footwear.

According to Kesavan of Elara, major challenges that the government needs to address for the revival of economic growth are rural distress, the drag on discretionary and staple consumption, recapitalisation of public sector banks, liquidity issues, and sustainability of infrastructure spending. He expects a strong earnings recovery in the current fiscal.

“Our estimate for FY20 Nifty EPS stands at 612, a 25 per cent growth from FY19E EPS of 489. Much of the recovery is expected from corporate banks. Energy, consumer discretionary and staples are other sectors where we expect robust performance,” Kesavan said.