The second quarter results of the Indian Corporate sector have started showing some signs of stability, attributable to declining negative impact of the Goods and Services Tax (GST) and the festive season, according to credit-rating body ICRA.
As per the agency's research, the aggregate revenues of 485 companies grew by 4.2 percent in Q2 FY 2018, compared to 6.7 percent in the first quarter of the year, despite many sectors reporting sequential improvement. However, even as revenue growth remained muted, the aggregate EBITDA margins of corporate sector reverted to 17.7 percent, aided primarily by benefits of operating leverage (i.e. higher volume growth) across sectors.
"The positive trend became visible as the transitory impact of GST implementation began to abate. This coupled with the early onset of the festive season and improved consumer demand, both in urban and rural markets supported recovery process across sectors. Even though margin expansion was limited to 12 sectors out of 30 during the quarter on Y-o-Y, on a sequential basis, most sectors reported improvement", said Subrata Ray, Senior, Group Vice President, Corporate Sector ratings, ICRA.
He added, "Largely most consumer-oriented sectors reported better performance, whereas sector-specific dynamics (like increasing competitive pressure in Telecom) and regulatory hurdles (in Pharmaceuticals) and recovery in commodity prices (Tyres, Airlines etc.) continued to restrain earnings growth".
In terms of sector-specific performance, the ICRA report noted that consumer-oriented sectors such as automobiles, FMCG, consumer durables and retail witnessed a pick-up in demand, backed by re-stocking by trade channels and also improved consumer demand. The gradual recovery in rural demand which helped companies in these sectors was the one aspect that stood out. The outlook remains promising in view of an increase in MSPs, and higher agricultural output.
The impact was evident in tractor sales too, which surged by 16 percent in FY 2018, driven by strong rabi led cash flows, a favourable impact of farm loan waiver in select states and replacement driven demand in North India. Entry-level motorcycle segment, another barometer of rural trend also showed positive trend during the current fiscal after dismal performance over the past few years.
As a result of improved consumer demand, most companies across consumer-oriented sectors reported improvement in operating margins during the quarter. Earnings growth was also supported by fairly stable input material costs (for select companies) and cost-reduction measures including calibrated spending on advertising and marketing.
The sectors where earnings have been under pressure for past few quarters include telecom, pharmaceuticals, airlines, tyres, real estate and shipping. telecom players continued to reported weak performance on a Y-o-Y basis as intensified competition drove profitability indicators down following sharp correction (down 40-50 percent) in realisations of data services, even as data consumption continued to grow at a swift pace.
As for pharmaceutical companies, pricing pressure in the U.S. generics market, limited new product launches in the generics space and higher costs associated with regulatory compliance hit margins. The domestic pharma business was impacted as trade channel resorted to de-stocking until July and started improving from October onwards.
Sugar sector, which witnessed a sharp recovery in earnings over the past couple of years, also saw margin pressure, especially among Uttar Pradesh-based mills because of higher cane costs and lower margins in by-products.
In contrast to above trends, the financial performance of commodity-oriented companies was relatively stable aided primarily by improvement in realizations. For instance, cement companies have reported higher aggregate EBITDA margins driven by higher realizations (on Y-o-Y basis). Some leading players outperformed the industry by ramping-up capacity and consolidation of acquired assets.
At an industry-wide level, cement production was subdued in H1 FY2018, due to a combination of factors including - muted demand from the housing sector, issues like sand availability in select states (UP, Bihar, Tamil Nadu among others), heavy rainfall and RERA compliance. Across regions, certain pockets in East India (barring Bihar) and South (AP/Telangana) continue to exhibit strong growth led by government spending.
Similar trends were also visible in the performance of entities the derive demand from the housing sector. For instance, cable and switchgear manufacturers indicated weak housing demand as the key factor for subdued demand. Likewise, many of the organised tile manufacturers also reported sub 4 percent growth in volumes on the back of subdued sentiment, post GST.
In the steel sector, the second quarter performance of companies remained fairly stable driven by improving steel demand, higher realisations, and benefits of lower coking coal costs. Nevertheless, the high indebtedness in the steel sector continues to remain a credit concern.
"The interest coverage of corporates sector stood 3.3 times (adjusted for relatively strong credit profile sectors). While aggregate interest coverage ratio (ICR) weakened marginally during the quarter, sectors with a higher level of stress (barring construction) witnessed stable trend in ICR", said Ray.