The consumption slowdown, which has already hit the March quarter (Q4) of financial year 2018-19 (FY19), will continue to haunt markets in the June quarter of FY20. Q4FY19 is turning out to be a damp squib with close to 500 BSE firms registering a three-quarter low topline growth amid poor demand coupled with liquidity crunch. The net sales for the sample of 488 BSE-listed companies grew at 10 per cent year-on-year in Q4FY19, the slowest in the last three quarters. Excluding BFSI firms, the volume growth got restricted to just 7.6 per cent. "Lower sales growth of Indian companies is on account of challenging domestic as well as global macro conditions. Consumption slowdown coupled with liquidity crunch has affected demand domestically, while weak global macros have built in uncertainty in sales and prices for global commodities, causing overall sales to slow down," says Vineeta Sharma, head of research, Narnolia Securities.
The past three quarters witnessed a decent double-digit volume growth on account of low base effect due to reformist measures like demonetisation and implementation of Goods and Services Tax (GST), but the base is not encouraging any more. "The slower growth is a function of two factors, one is the base effect. The base has moved up because in FY17, there was an impact of two major events of demonetisation and GST implementation. So, base is not favourable any more. We have also witnessed slowdown in consumption. Many FMCG companies have attributed the slowdown to the onset of elections and slowing consumption trends in the rural market. The election phenomenon could reverse in the forthcoming quarters but a structural slowdown in the economy could pose a big challenge," adds Naveen Kulkarni, head of research, Reliance Securities.
Marred with slow revenue growth, bottomline numbers were a disappointment too. The operating profits of the ex-BFSI sample grew 3.5 per cent in Q4FY19, the slowest in the last three quarters. However, profit after tax grew at 5.4 per cent as compared to 1.3 per cent and 2.9 per cent y-o-y in the last two consecutive quarters. "The profit growth has been impacted by slow revenue growth and impact of operating leverage working negatively," adds Kulkarni. However, this could reverse to some extent in the forthcoming quarters if revenue growth picks up, he adds further.
The fiscal show
The volume growth for companies picked in FY19 after registering a degrowth in previous two fiscal years on account of demonetisation and the implementation of GST. The FY19 net sales of the ex-BFSI universe logged a six-year high double-digit growth of 14.2 per cent in FY19 as compared to 7.2 per cent in FY18. "Expansion in volume growth for companies will now be dependent on an increase in market share rather than increase in the market itself," says Sharma.
Rising input costs due to volatile commodity prices and weaker operating leverages has impacted the bottomline of companies and put pressure on the margins. FY19 saw net profit growth of 3.8 per cent as compared to 4.2 per cent jump in Q4FY18 and 16.9 in Q4FY17. Cost of services and raw materials as percentage of net sales grew 2.3 percentage points in the past two fiscal years. "Input cost inflation, especially denominated by crude, is likely to remain a medium term concern," says Kulkarni. Employee expenses as a percentage of sales saw a slight moderation from 11.6 per cent to 11.4 per cent during the period. Moreover, debt funding is either getting costlier or not easily available as interest expenses inched up to 2.9 per cent from 2.5 per cent, as a percentage of net sales. According to Sharma, "There are weaker operating leverages within the company due to unutilised capacity, higher inventory in the system, higher power and freight costs." She analyses that sales and promotion expenses where the company has some control to manage EBDITA are also rising due to weaker demand. All of this translated into lower margins wherein both operating profit and net profit margin declined close to 100 basis points in the last two fiscal years. Sharma expects that EBDITA (earnings before depreciation, interest, taxes and amortisation) margins pressure in the near-term should continue, but as the topline for companies grows, margins should pick up.
Growth in GVA in agriculture has been slowing since Q1FY19 from 5.1 per cent to 2.7 per cent in Q3FY19. It may continue to fall in Q4FY19 too. The adjusted series of average wage rates calculated by CMIE for rural labourers engaged in agricultural and non-agricultural activities for men dipped from 4.45 per cent in December quarter of FY17 to 3.85 per cent in the March quarter of FY19. The automobile segment's demand remains under pressure largely on account of higher inventory levels, high base last year and weak consumer sentiment. Overall, the fundamentals remain fragile with poor demand and rural distress. Some consumer companies have also indicated a sequential slowdown in their top line numbers in their rural pockets.
The sectoral show in Q4FY19 was a mix bag with a majority of them going with the tide of de-accelerated volume growth. The worst hit were the diamond and jewellery, infrastructure, retailing and healthcare sectors as their revenue growth slid over 8 percentage points in the last two quarters. Being a part of the jewellery industry, Titan, with over 80 per cent turnover coming from the jewellery division, bucked the trend with revenue growth of 19 per cent. Its jewellery division recorded a strong revenue growth of 21 per cent. The companies in healthcare sector posted a massive decline of 50.4 per cent in net profits. Infrastructure firms and companies in retailing too posted a fall of over 15 per cent in their profit after tax in Q4FY19. "Infra was expected to slow down considering this was the last quarter of the incumbent government. If the ruling party gets another term, the pickup in infra spending is very likely and the current slowdown will reverse. Healthcare is impacted by many other factors, which are not domestic in nature," highlights Kulkarni.
The consumption-oriented sectors have seen a slowdown with some pockets of discretionary consumption seeing a significant decline. The consumer durables segment posted a growth of 15.7 per cent in net sales, but net profit declined 5.2 per cent in the last quarter. Significant inventory pile up and volume pressure was visible on passenger vehicles (PV) and two-wheeler segments in FY19. The four-year low growth of 3 per cent y-o-y in the PV segment coupled with y-o-y growth of 5 per cent in two-wheeler segment - the slowest in the past two years - represent the tepid demand the auto segment is currently battling with. The FMCG space saw a net sales growth of 10.1 per cent in Q4FY19 as compared to 13.2 per cent growth in the previous quarter. The FMCG major Hindustan Unilever saw some moderation in volume growth at 7 per cent in March quarter after registering a double-digit growth in last five quarters. Gross margins contracted 30 basis points y-o-y to 52.3 per cent. "Automobiles, consumer companies have reported relatively weak numbers. IT has posted in-line performance," says Gautam Duggad, head of institutional research, Motilal Oswal Financial Services.
Amid slower than expected growth in companies, the Indian corporate banking is showing some signs of improvement. The banking firms, which contribute nearly 5 per cent to the aggregate profits of our sample, reported better earnings during Q4FY19 with aggregate net profits of Rs 2,629 crore as compared to a combined loss of Rs 3,239 crore reported in the corresponding quarter of FY18, led by reversal of NPA cycle and lower provisioning. The sector, however, witnessed a sequential fall of 73 per cent in their net profits from Rs 9,780 crore to Rs 2,629 crore. "Asset quality has improved, provision coverage ratio has gone up and loan growth has improved too. Guidance from corporate banks has been encouraging for FY20. We are expecting 57 per cent of incremental profit in Nifty in FY20 to be driven by BFSI," adds Duggad.
The companies in logistics and realty space showed a good growth in their bottomline and topline numbers in the March quarter. The realty space logged over 100 per cent growth in net profits while the logistics segment reported a jump of 75.2 per cent in the same. Kulkarni from Reliance Securities points out that a quarter is not enough to read into the numbers of these two sectors as there can be significant amount of volatility. "Long-term trends are more critical and at present realty is a mixed bag with major challenges on the financing front. Logistics has lower volatility and long-term growth prospects are encouraging. However, rising fuel costs are a cause of concern for the sector," he explains further.
By the end of this month, bulk of companies will come out with their fourth quarter results that may further affirm our stance of weaker-than-expected earnings season. However, once the dust settles on the political uncertainty, monsoons, rural distress and global growth will direct the discourse.