Another weak quarter

High costs and weak sales hurt India Inc

Corporate India is facing new challenges to growth, going by the April-June quarterly financial data of more than 600 companies that have declared their results so far. The gains from lower commodity and energy prices are over and operating margins are now on a downward trajectory due to a combination of higher raw material costs and lower growth in revenues. For the entire sample of 687 companies, net profit has declined 2.8 per cent year-on-year (YoY) in the June 2017 quarter, which is the worst in five quarters. If companies in the oil and gas, and banking and financial sectors are excluded, net profit has declined by 2.9 per cent, which is the worst in the last six quarters. The net profit growth figures are at a three-year low if the large exceptional losses posted by companies such as Vedanta, Tata Consultancy Services, and Tata Steel in the past are excluded. The revenue growth of ex-oil and financial services companies is down to 5.7 per cent YoY in the June quarter from 7.6 per cent in the March quarter and 6.3 per cent in the June 2016 quarter.

While the oil and gas, and metals and mining sectors have reported 20 per cent plus revenue growth, the weak performance of the information technology (IT), pharmaceuticals, and telecom sectors has weighed on the numbers. Top line growth for IT companies — the country’s biggest exporters — is the lowest in the last three years while core operating margins (excluding other income) are the lowest in at least four years. This is due to a combination of lower revenue growth and a steady rise in labour cost. Pharmaceuticals have reported a 1.7 per cent decline in revenue growth, the first in several years, as exports to the US have been disrupted due to the US Food and Drug Administration action against several Indian exporters. The disruption in the telecom industry due to the low-cost service of Reliance Jio has taken a toll on the sector’s revenues, with a more than 12 per cent drop in the second consecutive quarter. The net profit of IT is down marginally, while pharma companies have seen their profits halve and telecom a loss in Q1 FY18 compared to a profit a year ago. Exporters have also faced headwinds from the appreciating rupee.

After demonetisation in November 2016, businesses that sell their goods and services largely in the domestic market are braving another uncertainty in the wake of the goods and services tax. While oil and gas, and metals and mining firms are cyclical commodity plays where prices are driven more by global demand and supply, the net profit growth of India market-focused companies excluding financials is down 9.5 per cent during the quarter, which is the worst in at least three years. In comparison, net profit growth for the sample was up 9.8 per cent a year ago and 2.9 per cent in the March 2017 quarter. Clearly, India Inc is not out of the woods as yet.