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The pain has increased and there is little hope of it subsiding in the near future. That just about sums up the state of corporate India after the results of the quarter ended June 2013.
Though net sales of the 1,961 companies (excluding banks, financials, state-owned oil and gas) that have declared results till August 13, are up 3.6%, it is the lowest in the past 13 quarters.
The combined adjusted net profit has declined by 5.4% to Rs 61,186 crore compared to the corresponding period last year. And while operating margins have inched up marginally year-on-year to 15.7% as the total expenditure grew at same space at 3.8% , the aggregate intere st burden has surged 19%.
A majority of research houses exclude public sector oil companies to get a true picture of broad earnings trends given the volatility in earnings of these companies. The June quarter is again proof of it. If these companies are included in the sample, the net profits of India Inc would more than double. The reason: Six oil and gas companies – Indian Oil, BPCL, HPCL, ONGC, Oil India and MRPL have seen their combined net loss decline by 98% to Rs 780 crore from Rs 35,049 crore in the year ago quarter.
Adjusting for public sector oil companies, experts say the results are not encouraging and the trend is likely to get worse in the coming quarters.
With inflation hovering between five and six%, market participants say the real demand growth (measured through sales growth) is in the negative territory. Also, unlike earlier, a larger part of India Inc is facing pressure on various counts. Says Prasad Koparkar, Senior Director - Industry and Customised Research, CRISIL Research, “The malaise seems to be spreading. It is not now restricted to a few sectors. Earlier, it started with capital goods, infra related and construction. Now it has spread to much larger space like auto, chemicals, industrials and metals. So, barring three-four sectors, most others are not doing well.”
Falling sales growth and rising interest cost have led to a decline in India Inc.’s net profit. Worse, things are not expected to improve anytime soon. Industry believes that correcting structural issues would take at least two years. If at all the rate easing cycle begins again, it won't be before March 2014. Given the macro-economic challenges like weakening of the currency and elevated current account deficit, the Reserve Bank of India has abruptly halted its easing cycle.
V Ashok, group CFO of Essar, says: "We don't expect interest rate cuts before March 2014 and this may derail investment plans. We are looking at dollarising our debt as we have a natural hedge of export earnings. The environment will remain challenging through FY14 and FY15 as interest costs would remain high for corporates. Even though RBI has cut rates since last year, they have not been passed on to borrowers."
It’s not only small and mid-cap companies that are facing the heat. Larger ones are also under pressure.
Says Rajat Rajgarhia, Managing Director – Institutional Equities, Motilal Oswal Securities Limited, “Excluding BPCL, the top line growth for Nifty companies is just three%, while their profits are down 4% compared to the year ago period.”
He says the Q1 numbers are quite disappointing as the topline growth is the lowest in a decade (excluding the year of global crisis) for Nifty companies and pricing power has vanished across sectors. Given that Ebidta grew by just two%, clearly interest costs are an issue, but the bigger worry is that demand is down and that is hurting pricing power of companies.
Post results, Motilal Oswal Securities has seen a 400-500 basis points downgrade in Sensex EPS growth, which the research house now pegs at 7% in FY14.
A deeper look at the results suggests that more than half the companies have reported a decline in profit or a loss in the June quarter. Data compiled by the BS Research Bureau show that 538 companies have reported net loss, while 529 companies saw profits decline. Of the firms that reported losses, nearly 177 companies had posted profit in the year-ago period, including Jet Airways, Adani Enterprises, Ashok Leyland, Tata Power, Siemens and Torrent Power.
Positively, about 115 firms, including Tata Communications, Madras Fertilisers, HCC, Punj Lloyd and TV18 Broadcast have seen turnaround in earnings by posting an aggregate net profit of Rs 342 crore against loss of Rs 593 crore.
IT, pharmaceutical and FMCG companies, which reported an average 16% net profit growth on back of 15% jump in operational income, have saved the day for corporate India. Excluding these three sectors, the aggregate net profit would have declined by 11.7%, while net sales growth would be 2.3% for June 2013 quarter compared to the year ago period.
Continued growth in US markets and depreciation of the rupee against the dollar have helped the IT and pharma sectors to report good numbers in this quarter. The telecom sector too has seen improvement.
The capital goods sector reported weak performance across the board due to a slowdown in orders flow. In fact, Rajgarhia says capital goods companies have shown a fall in revenues, something not seen in many quarters.
Earnings of cement companies were also hurt due to low volume growth and margin pressure, while the metals sector has performed poorly owing to lower realisations.
So, what’s in store for India Inc. going ahead?
“The government's recent positive announcements are unlikely to result in a V-shaped recovery in the capex (capital expenditure) cycle. Rather, India first needs to address some structural issues (land acquisition, over-leveraged private sector, changes in contract terms, etc), which we expect to take at least 18 months," says Aditya Bhartia of Espirito Santo Securities in a July 2013 report.
Rajgarhia shares a similar view. He says, “Firstly, one has to see where the earnings downgrades stop. Recent RBI measures will have a negative impact and will reflect in the second and third quarter numbers. Now, banks are also raising base rate”.
So does Koparkar. He says, “Overall, at least for some of the important sectors, earnings downgrades cycle still continues and there is more downside in the near-term.”
Making a crucial point, he says, “Overall interest outgo has gone up by 20% year-on-year. Though you don't get a break up in terms of how much of the increase is towards sustaining business and how much for growth investment. The worrisome part is that a large part of this is not growth driven but sustenance driven, that is, for supporting stretched working capital (due to delayed payment). Just to remain above the water, companies are forced to borrow. This is not a good sign.”
In an environment of weakening demand and rising interest rates, further increase in interest costs could significantly hurt those companies, which have high debt and low interest coverage ratio (operating profit as a percentage of interest costs), possibly leading to problems in servicing debt and repayment obligations. And, this could further add to pressure on banks.
Though net sales of the 1,961 companies (excluding banks, financials, state-owned oil and gas) that have declared results till August 13, are up 3.6%, it is the lowest in the past 13 quarters.
The combined adjusted net profit has declined by 5.4% to Rs 61,186 crore compared to the corresponding period last year. And while operating margins have inched up marginally year-on-year to 15.7% as the total expenditure grew at same space at 3.8% , the aggregate intere st burden has surged 19%.
A majority of research houses exclude public sector oil companies to get a true picture of broad earnings trends given the volatility in earnings of these companies. The June quarter is again proof of it. If these companies are included in the sample, the net profits of India Inc would more than double. The reason: Six oil and gas companies – Indian Oil, BPCL, HPCL, ONGC, Oil India and MRPL have seen their combined net loss decline by 98% to Rs 780 crore from Rs 35,049 crore in the year ago quarter.
Adjusting for public sector oil companies, experts say the results are not encouraging and the trend is likely to get worse in the coming quarters.
With inflation hovering between five and six%, market participants say the real demand growth (measured through sales growth) is in the negative territory. Also, unlike earlier, a larger part of India Inc is facing pressure on various counts. Says Prasad Koparkar, Senior Director - Industry and Customised Research, CRISIL Research, “The malaise seems to be spreading. It is not now restricted to a few sectors. Earlier, it started with capital goods, infra related and construction. Now it has spread to much larger space like auto, chemicals, industrials and metals. So, barring three-four sectors, most others are not doing well.”
Falling sales growth and rising interest cost have led to a decline in India Inc.’s net profit. Worse, things are not expected to improve anytime soon. Industry believes that correcting structural issues would take at least two years. If at all the rate easing cycle begins again, it won't be before March 2014. Given the macro-economic challenges like weakening of the currency and elevated current account deficit, the Reserve Bank of India has abruptly halted its easing cycle.
V Ashok, group CFO of Essar, says: "We don't expect interest rate cuts before March 2014 and this may derail investment plans. We are looking at dollarising our debt as we have a natural hedge of export earnings. The environment will remain challenging through FY14 and FY15 as interest costs would remain high for corporates. Even though RBI has cut rates since last year, they have not been passed on to borrowers."
It’s not only small and mid-cap companies that are facing the heat. Larger ones are also under pressure.
Says Rajat Rajgarhia, Managing Director – Institutional Equities, Motilal Oswal Securities Limited, “Excluding BPCL, the top line growth for Nifty companies is just three%, while their profits are down 4% compared to the year ago period.”
He says the Q1 numbers are quite disappointing as the topline growth is the lowest in a decade (excluding the year of global crisis) for Nifty companies and pricing power has vanished across sectors. Given that Ebidta grew by just two%, clearly interest costs are an issue, but the bigger worry is that demand is down and that is hurting pricing power of companies.
Post results, Motilal Oswal Securities has seen a 400-500 basis points downgrade in Sensex EPS growth, which the research house now pegs at 7% in FY14.
A deeper look at the results suggests that more than half the companies have reported a decline in profit or a loss in the June quarter. Data compiled by the BS Research Bureau show that 538 companies have reported net loss, while 529 companies saw profits decline. Of the firms that reported losses, nearly 177 companies had posted profit in the year-ago period, including Jet Airways, Adani Enterprises, Ashok Leyland, Tata Power, Siemens and Torrent Power.
Positively, about 115 firms, including Tata Communications, Madras Fertilisers, HCC, Punj Lloyd and TV18 Broadcast have seen turnaround in earnings by posting an aggregate net profit of Rs 342 crore against loss of Rs 593 crore.
IT, pharmaceutical and FMCG companies, which reported an average 16% net profit growth on back of 15% jump in operational income, have saved the day for corporate India. Excluding these three sectors, the aggregate net profit would have declined by 11.7%, while net sales growth would be 2.3% for June 2013 quarter compared to the year ago period.
Continued growth in US markets and depreciation of the rupee against the dollar have helped the IT and pharma sectors to report good numbers in this quarter. The telecom sector too has seen improvement.
The capital goods sector reported weak performance across the board due to a slowdown in orders flow. In fact, Rajgarhia says capital goods companies have shown a fall in revenues, something not seen in many quarters.
Earnings of cement companies were also hurt due to low volume growth and margin pressure, while the metals sector has performed poorly owing to lower realisations.
So, what’s in store for India Inc. going ahead?
“The government's recent positive announcements are unlikely to result in a V-shaped recovery in the capex (capital expenditure) cycle. Rather, India first needs to address some structural issues (land acquisition, over-leveraged private sector, changes in contract terms, etc), which we expect to take at least 18 months," says Aditya Bhartia of Espirito Santo Securities in a July 2013 report.
Rajgarhia shares a similar view. He says, “Firstly, one has to see where the earnings downgrades stop. Recent RBI measures will have a negative impact and will reflect in the second and third quarter numbers. Now, banks are also raising base rate”.
So does Koparkar. He says, “Overall, at least for some of the important sectors, earnings downgrades cycle still continues and there is more downside in the near-term.”
Making a crucial point, he says, “Overall interest outgo has gone up by 20% year-on-year. Though you don't get a break up in terms of how much of the increase is towards sustaining business and how much for growth investment. The worrisome part is that a large part of this is not growth driven but sustenance driven, that is, for supporting stretched working capital (due to delayed payment). Just to remain above the water, companies are forced to borrow. This is not a good sign.”
In an environment of weakening demand and rising interest rates, further increase in interest costs could significantly hurt those companies, which have high debt and low interest coverage ratio (operating profit as a percentage of interest costs), possibly leading to problems in servicing debt and repayment obligations. And, this could further add to pressure on banks.
