News Analysis

India Inc begins with a solid show in the June quarter

Anand Kalyanaraman BL Research Bureau | Updated on July 30, 2018 Published on July 29, 2018

Robust volume growth helps, but low base and cost pressures warrant caution

 

India Inc seems to have got off to a solid start to FY19, going by the June 2018 quarter scorecard of about 370 companies so far. Their combined revenue has risen nearly 22 per cent YoY in the June quarter and profit is up almost 19 per cent YoY. That’s sweet news, coming after the earnings disappointment in FY18, which saw the aggregate profit of this set dip 5 per cent despite sales growth of 12 per cent.

The robust June quarter earnings performance until now was largely made possible by many biggies across several sectors delivering strongly. Profit growth is more than 40 per cent YoY for L&T, 24-30 per cent for TCS, Maruti Suzuki and Asian Paints, and 18-19 per cent for HDFC Bank and Hindustan Unilever.

The overall earnings picture gets even better if we consider that Reliance Industries, India’s most profitable company, showed adjusted profit growth of 18 per cent YoY, much higher than its reported profit growth of about 5 per cent.

 

This strong show by corporate India has been driven by several factors. Healthy double-digit volume growth aided by a pick-up in rural demand benefited the auto, paint and consumer goods companies. Growth in the US economy and a weak rupee aided the export-oriented software sector. L&T benefited from the progress in the domestic infrastructure sector led by government projects. HDFC Bank’s good show continued with healthy growth in both its retail and corporate loan book. Reliance Industries gained from an expansion in its petrochemicals business and a ramp-up in its digital and retail segments.

Low base

But despite the promising start, it may be a bit early to celebrate. One, a key factor helping India Inc’s June 2018 quarter performance is the low base in the year-ago period. Many companies went into de-stocking and pause mode in the June 2017 quarter ahead of the rollout of GST. The aggregate sales and profit growth in that quarter for the current set of about 370 companies was just about 8 per cent and 7 per cent, respectively, YoY. While a low base could help companies for another quarter at least, this transient advantage will eventually wear off.

Next, it was largely volume growth that boosted overall profits. Without this, India Inc’s bottomline might have been tripped up by higher commodity costs, made worse by a weak rupee. For the about 250 manufacturing-based companies in this set, raw material costs rose at a rapid pace (nearly 32 per cent YoY), the fastest in many quarters. With pricing power not uniformly strong, the aggregate raw material costs of these companies as a percentage of sales went up to more than 42 per cent — up from about 40 per cent in the June 2017 quarter.

Higher material costs

Despite an increase in sales volumes, companies such as Hero MotoCorp and Kansai Nerolac Paints saw their profits dip, partially due to higher material costs. Even Reliance Industries’ profit growth (18 per cent) was much slower than its revenue growth of 57 per cent, reflecting the impact of lower refining margins and higher depreciation and interest costs incurred due to big expansions.

On the whole, interest costs were up sharply in the June quarter: the aggregate rose nearly 29 per cent YoY for about 310 entities excluding banks and finance companies. Higher borrowing costs could add to the troubles of not just highly indebted companies but also several banks, which are having a hard time recovering their money. ICICI Bank, for instance, posted its first-ever quarterly loss in the June 2018 quarter, due to higher provisioning for its bad loans. Also, many PSU banks that posted huge lossess in the March 2018 quarter could again take a knock.

Besides, even some sector leaders saw their struggles continue. Telecom leader Bharti Airtel, for instance, again saw its profit dip sharply in the June quarter due to the competitive onslaught of RJio.

Finally, it is still early days with many key results expected over the coming weeks; the laggards often make a late entry.

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