- Overall OPM increases by ~ 130 basis points
- Out of 32 sectors analysed, 26 sectors showed broad-based revenue growth
Indian corporate sector’s aggregate revenues have grown by 17.1% during the first quarter (Q1 FY 2019), on a Y-o-Y basis compared to Q1 FY 2018. As per ICRA Research, 660 companies in the Indian Corporate Sector and; 26 sectors out of 32 sectors under coverage, showed broad-based revenue growth. While consumer-oriented sectors (auto OEMs, FMCG, consumer durables, restaurants and airlines) and commodity-linked sectors (cement, Iron & Steel and Oil & Gas) continue to do well, sectors like capital goods, pharmaceuticals, media and fertilizers have also witnessed strong revenue growth in Q1 FY 2019.
Says, Mr. Shamsher Dewan, Vice President and Group Head, Corporate Sector ratings, ICRA, “This growth has been achieved on low-base, adversely impacted by GST implementation in Q1 FY 2018 besides, healthy consumption-driven demand as well as pick-up in infrastructure spending. However, on a Q-o-Q basis, sales declined by 2.4% because of seasonality in several sectors.”
Sectors that witnessed decent margin improvement were metals and mining (including iron & steel) due to up-tick in commodity prices and; the consumer food sector, supported by lower input costs like milk and sugar. Sectors like consumer goods, paints, FMCG and Auto OEMs expanded their OPM marginally as they partially absorbed raw materials price hikes to mitigate the impact. On the other hand, the margins of the airlines, tiles & ceramics and cement sector witnessed significant erosion in margins due to rising fuel prices, while factors like subdued realizations (sugar), charter rates (shipping), decline in APRUs and rise in network costs (telecom) too exerted pressure on earnings of companies.
As for the trends in sectors which performed well:
- Consumer-oriented sectors like FMCG, consumer durables, restaurants and automobiles continued their good run driven by healthy urban demand and rural recovery. The sustained volume growth despite price hikes indicates continued growth momentum in the domestic market. Further, the outlook remains benign driven by expectations of normal monsoons, hike in MSPs and overall thrust on agri-economy ahead of elections.
- Pharmaceutical sector saw a 15.7% revenue growth in Q1 FY 2019 because of low-base, as sales declined significantly in Q1 FY 2018 because of GST implementation related de-stocking. Besides benefits of operating leverage, the EBITDA margins were supported by strengthening of US Dollar and lower R&D costs which mitigated the impact of rise in raw material prices.
- Capital goods companies reported a 7.9% growth on a Y-o-Y basis driven by order intake from railways (for electrification), industrial, hydrocarbon (refinery expansion and BS6) and plant pollution control equipment for power and fertilizer sector.
- In the real estate sector, there has been some revival in the affordable housing projects and some tier one markets has seen improvement. Besides RERA implementation has triggered a phase of consolidation in the sector thereby aiding large organized developers.
- The allied building materials sector witnessed a 12.8% revenue growth, albeit on a low-base of Q1 FY 2018. However here the unorganized segment continues to have a reasonable market share and the noticeable transition to organized segment post- GST is yet to materialize.
- Commodity-oriented companies performed well in Q1 FY 2019 primarily due to improvement in realizations. The steel sector’s healthy performance was driven by improving steel demand, higher realizations and benefits of flat coking coal costs. Nevertheless, the high indebtedness in the steel sector and debt-funded M&As (because of NCLT led auctions) continues to remain a credit concern. Oil & gas companies witnessed growth supported by sharp increase in oil prices and higher gas tariffs.
Coming to key sectors where performance is not so strong, ICRA’s analysis indicates earnings pressure since past few quarters in telecom, sugar and shipping.
- Airlines too have been facing rough weather from Q1 FY 2018 which has only intensified further due to sharp increase in global oil prices, strengthening of the US Dollar and pressure on yields.
- As for Cement companies, their margin pressure in Q1 FY 2019 was due to higher fuel and logistics costs (pet coke and diesel prices) and pressure on realizations on a Y-o-Y basis. This despite a healthy production growth of 14.2% in Q1 FY 2019 on a Y-o-Y basis. Revival in margin may be expected on the back of pick-up in infrastructure and; affordable and rural housing.
- Telecom sector is facing headwinds due to increased competitive intensity and sharp downward correction in ARPUs, which were lower by 30-35% Y-o-Y in Q1 FY 2019, in terms of realisations of data services, even as data consumption continued to grow at a swift pace. The net losses from the telecom sector had a major bearing on decline in OPM for ICRA sample set in Q1 FY 2019.
Concludes Mr. Dewan, “Overall operating profit margin (OPM) of our sample increased by ~130 basis points to 17.2 % in Q1 FY 2018, despite rising inflationary pressures on the raw material front. This is attributed to the benefits of operating leverage and price hikes affected by companies across many sectors to offset the impact of rising fuel and commodity prices. Further, the improvement in profit margins led to a marginal improvement in the aggregate interest coverage ratio of the current sample to 4.5x as compared to 4.2x during the quarter.”