India Inc’s 14.8% revenue growth in Q4 is a mirage

Listed companies appear to have improved their sequential revenue growth, going by the first set of corporate results released for the fourth quarter of FY 2017. But their topline performance is a bit overstated, and they are beginning to feel the pressure on profitability due to increased input costs.

An analysis of 279 companies, which have announced their earnings for the March 2017 quarter, shows their aggregate revenue has grown at a seemingly healthy 14.8 per cent as compared to the corresponding quarter in 2016. This is higher than the 10.5 per cent growth in the December 2016 quarter.

Banks and finance companies and companies with no revenue were excluded from this analysis. Consolidated numbers have been considered, wherever available.

However, the faster pace of revenue growth gives no grounds for excessive optimism as it could be partly due to a low base-effect: the March 2016 quarter marked the lowest point in revenue growth in recent years.

The higher nominal growth in revenue is also attributable to higher inflation: the WPI is currently gallopping at 5.7 per cent.

Besides domestic inflation, a recovery in international commodity prices helped the topline of companies such as Reliance Industries and Hindustan Zinc.

Additionally, their operating profit margin fell to 15.6 per cent in the March 2017 quarter from 16.4 per cent in the year-ago quarter. This was mainly due to higher raw material costs which eroded their profitability, although lower fuel and finance costs provided some relief. This accounted in large part for the slightly lower net profit growth in the fourth quarter of FY 17 as compared to the third quarter.

Urban consumption, however, appears to be on a strong footing as evidenced by the strong earnings of Maruti, the largest player in domestic passenger car manufacturing, this quarter.

Some effect of demonetisation is evident in the revenue growth of FMCG companies such as Dabur and Emami. Lower offtake of their goods in the wholesale channel due to the limit on cash transactions is reported to be hurting business.

Another segment that saw sluggish growth owing to the note ban was cement. January was the weakest month for cement sales, but since then, there has been a gradual improvement.

IT majors such as TCS and Infosys reported lower growth in revenue and profitability. They were hit by an inability to grow their footprint in the digital space, slowing orders in key overseas markets, and a conservative approach to betting on inorganic growth.

The asset-quality pain of banks may persist, going by the results of private banks declared so far.

While the revenue growth presents a mixed picture, operating profits are definitely under pressure due to rising cost of inputs. The CRB commodity index, which captures the increase in global commodity prices, gained nearly 29 per cent between February 2016 and January 2017. This rise has driven the domestic price of metals, agri-commodities and energy too.

Nearly half the companies in our sample recorded lower operating margins; more than a tenth of the companies recorded a decline of over 5 percentage points in their operating margin in the March 2017 quarter compared to the year-ago quarter. Raw material costs as a proportion of sales increased from 27.98 per cent in the March 2016 quarter to 32.77 per cent in the March 2017 quarter.

Tyre companies such as Apollo Tyres, CEAT and MRF saw their operating margins fall due to an increase in the prices of rubber and other inputs. Cement companies, including ACC, Ambuja and UltraTech, were hit by the higher prices of coke, pet coke and diesel. Auto and auto-component manufacturers, too, were similarly squeezed.

These are, however, only the first set of numbers: the aggregate picture may change once all the results are in.

The good news for India Inc is that commodity prices have begun to cool since February, with corrections in the prices of crude oil, rubber and metals.

This will help margins in the coming quarters. The progress and distribution of the monsoon, and the implementation of the GST will impact earnings in the next few quarters.

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