Signs of revival?

The results of 498 firms indicate mild demand recovery

The September 2017 quarter results suggest that a mild demand recovery is underway in corporate India after the disappointing June quarter. Combined revenue growth for 498 companies at 11.4 per cent year-on-year (YoY) in the quarter was the second-highest in 12 quarters, buoyed by higher commodity prices. It was a critical quarter in the history of corporate India as the country made the shift to the goods and services tax (GST) regime, and companies seem to have done better than expected. Operating profit grew 11.3 per cent — just a tad lower than revenue growth as costs increased in line with revenue. The operating profit margin is on a revival path — it had fallen from a high of 17.9 per cent in the June 2016 quarter to 12.1 per cent in March 2017 and has now come back to 16.1 per cent. However, at net profitability level, India Inc did not do as well, as net profit grew just 4.3 per cent. However, a closer look reveals that a 1.6 per cent year-on-year decline in other income led to the fall in net profit growth, and that the rise in operating costs kept pace with the rise in revenue. The results also look good compared to those in the June 2017 quarter, which was particularly bad. Even as revenue grew 11 per cent YoY due to the commodity rally, operating profit declined 2.7 per cent and net profit grew just 0.8 per cent as a lot of business activity had come to a standstill in the last few days of the first quarter before the introduction of the GST on July 1.

The standout sector in Q2 has been metals and mining as commodity prices have been on the rise. The sector’s net profit grew 49 per cent YoY on a revenue growth rate of 26.6 per cent. On the other hand, the information technology sector did not surprise with a tepid 3.5 per cent revenue growth rate and 2.2 per cent net profit growth rate, mainly on account of currency gains. As regards domestic market-focused companies, revenue growth at a 16-quarter high of 7.4 per cent reflects a combination of price increases due to higher raw material prices and demand growth confirming the recovery, though pricing power remains a challenge. Higher raw material and power costs stunted operating profit growth at 5.1 per cent YoY, and net profit grew just 2 per cent. Between March 2015 and December 2016, profit growth was in teens, but fell sharply to 2.8 per cent in the March 2017 quarter and declined 4 per cent  in the June quarter — the aftermath of the note ban and retailers’ de-stocking before the introduction of the GST on July 1.

Interest costs of India-focused companies have gone up 17 per cent, most likely due to higher working capital requirements after the GST roll-out. Going forward, this would get corrected and improve profitability. While the present data indicates improvement after a poor Q1, it can’t be termed robust as companies struggled to pass on raw material and power cost increases to consumers. A clearer trend will emerge in the next few days as more companies report their September quarter results. For the next few quarters though, an improvement in capacity utilisation and the return of pricing power will be required for the recovery to be meaningful and sustainable.