India Inc falters

Q4 results confirm tepid GDP growth

The results for the January-March 2017 quarter may appear impressive at first glance  — corporate India’s revenues grew 10 per cent and net profit was up 20 per cent for 2,264 companies. But the strong revenue growth was due to rising commodity prices and the improvement in net profit can be attributed to better profitability of public sector banks (PSBs) and metals producers on a year-on-year (YoY) basis. Many PSBs reported a profit after a loss in the March 2016 quarter, which, in turn, was a result of the Reserve Bank of India’s (RBI’s) asset quality review that required higher provisioning for bad loans in financial year 2016. Net profit growth at 30 per cent was better in the third quarter of FY17. If the financial and oil and gas sectors are excluded from the Q4 analysis, the weakness becomes apparent: Revenues grew by just 5.9 per cent for 1,860 companies and net profit was actually down by 6.7 per cent YoY — the lowest in nine quarters. 

Since it was the first quarter after demonetisation, a disaggregated analysis would be a better indicator to ascertain the health of India Inc. If one focuses on companies catering largely to the domestic market, in Q4, the net profit growth was at a three-year low of 19.2 per cent YoY and net sales growth, at 3.3 per cent, was the lowest in seven quarters. To that extent, the corporate performance confirms the tepid gross domestic product growth of 6.1 per cent in Q4. While demonetisation impacted demand and top-line growth of India Inc, a steady rise in raw material and staff costs led to lower profitability. Operating profit margins were down 130 basis points (bps) YoY as raw material costs as a percentage of revenue increased by 140 bps, while employee costs went up by 40 bps. 

A Credit Suisse analysis of the companies forming the BSE100 index also highlighted that though Q4 sales growth of 9 per cent was the highest in 11 quarters, excluding oil and metal companies, it was the lowest since March 2009. Credit Suisse said the number of Nifty companies which beat the brokerage’s estimates was at a four-year low. Kotak Institutional Equity also described the Nifty 50’s Q4 performance as a “hollow beat” as it was largely due to the strong performance in the overseas operations of Tata Motors, large gains for state-owned refineries on account of the crude oil price increase, and high other income for Oil and Natural Gas Corporation. 

There are justified concerns about the results and the outlook going forward. The underlying drivers for most sectors continue to be weak, which has led to further earnings downgrades. Credit Suisse expects the 14 per cent FY18 consensus earnings growth expectation to come down to 6-8 per cent as the year progresses. However, the unimpressive Q4 data and analysts’ forecast of lower earnings growth have not dented investors’ confidence in the Indian markets with the two bellwethers — the BSE Sensex and the NSE Nifty — continuing to move up. Clearly, the exuberance on Dalal Street is not in consonance with either the broader economic data or overall corporate performance.