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Early Q3 numbers show continuing decline in revenue growth

Around 2 per cent of BSE-listed companies have declared their third quarter (October-December) results so far. These early numbers, however, are not suggestive of any trend that indicates otherwise.

twitter-logoNiti Kiran | January 25, 2016 | Updated 13:11 IST
Some respite, however, was visible in bottom line numbers with operating and net profits registering a growth of around 21 per cent and 13.6 per cent year-on-year (y-o-y) respectively.

Principal Research Analyst Niti Kiran
After three consecutive disappointing quarters in revenue terms, a broad-based earnings growth is quite unlikely in the December quarter. Analysts believe that this is definitely not an inflection point for India Inc. Says J.K. Jain, Derivative Analyst, Karvy Stock Broking, "The basket of Nifty 50 companies is expected to grow around 3-5 per cent in top line and 7-8 per cent in bottom line."

Around 2 per cent of BSE-listed companies have declared their third quarter (October-December) results so far. These early numbers, however, are not suggestive of any trend that indicates otherwise.

On an aggregate basis, this basket of 106 companies posted a total income decline of 8.4 per cent in Q3FY16 compared to the corresponding quarter last fiscal. A significant revival seems more distant given the fact that a double-digit revenue growth was last witnessed some 13 quarters ago.

Some respite, however, was visible in bottom line numbers with operating and net profits registering a growth of around 21 per cent and 13.6 per cent year-on-year (y-o-y) respectively.

The situation is similar to the one post the 2008 financial crisis when Indian corporates registered a double-digit profit growth of 17.4 per cent despite a disappointing revenue growth of (-) 1.3 per cent in the March-09 quarter primarily led by a global commodity collapse. "That phase lasted for a shorter period, but this time the revival would take a little longer," says Rakesh Valecha, Senior Director & Head - Credit & Market Research, India Ratings & Research.

The subdued commodity prices trigged by a global slowdown coupled with China's structural slowdown have resulted in lower raw material costs. The overall operating expenses as a per cent of net sales dropped 3.3 percentage points in the past four quarters. However, India Inc. has only partly passed on the lower cost benefits to customers, which resulted in operating margins expansion of around three percentage points.

"Moving forward, margins are expected to take a hit as companies would be focussing more on volumes growth," says Jain.

Now, let's view the data differently. If we remove oil & gas major Reliance Industries (RIL) from our list, the revenue growth was far healthier at 12.3 per cent with operating profits and net profits growth of 14.4 per cent and 5.1 per cent, respectively.

The revenue of RIL decreased around 26.0 per cent in Q3FY16, on a standalone basis, primarily led by the 42.7 per cent y-o-y decline in benchmark oil prices during the period. The declining commodity prices have depressed the topline growth of commodity focussed sectors. "Commodity-led companies are expected to pull down the overall topline growth," says Jain of Karvy.

The other commodity-linked sector that is expected to drag down growth further would be metals. The sector is expected to bear the brunt of muted realisations. No major metal company has declared its result so far; however, the sector reported a weak performance with revenues declining 10.5 per cent and net profits down around 70 per cent in the last quarter (September-2015).

The information technology (IT) space, which contributes over 30 per cent of the total revenue of the aggregate basket of companies declaring their results so far, includes IT majors such as TCS, Infosys and Wipro. Over a dozen companies in this sector posted an aggregate revenue growth of around 11 per cent and net profit growth of around 3 per cent. Sequentially, however, things looked uglier with a meagre top line growth of 0.6 per cent and net profit decline of around 18 per cent, clearly depicting the seasonal weakness of the sector due to the holiday season accentuated by the Chennai floods.

Banks, which included private players such as Kotak Mahindra and IndusInd bank, had a share of around 8 per cent in the aggregate revenues of 106 companies. It registered a revenue growth of 23 per cent and net profit growth of 16 per cent in the December quarter compared to the corresponding quarter last year.

An otherwise stressed sector saw healthy growth mainly on account of Kotak Mahindra Bank, whose net profit grew by 11.5 per cent sequentially, deriving merger benefits in terms of revenue synergies. The space is battling against a large pile of stressed assets. According to
Tarun Sisodia, Head, Anand Rathi Institutional Research, "The banking sector is taking a hit and the trend is expected to continue. Pessimism is getting build around the sector."

Aggregate revenue of three media companies grew by 22.7 per cent and operating and net profits grew around 26 per cent and 20 per cent respectively.  Media companies such as Zee Entertainment Enterprises and TV18 Broadcast registered a growth of 27 per cent and 31 per cent in their operating profits in the quarter gone by.

Two leading FMCG companies such as Hindustan Unilever (HUL) and Bajaj Corp have declared their results so far with lot more waiting in the pipeline. HUL registered a net sales growth of 3 per cent and net profit fell by 22 per cent. Bajaj Corp reported 18.7 per cent year-on-year growth in standalone profits and revenue increased 3.5 per cent in Q3FY16.  The sector is battling a weak demand scenario triggered by a sluggish rate of recovery in urban consumption.

The growth in nominal gross domestic product (GDP) which touched a decade low of 7.4 per cent in 1HFY16 is somewhat reflected in the topline growth of the corporates. "While we expect the EBITDA growth to be slightly ahead of nominal GDP growth in FY17, a sustained improvement to post global financial crisis period growth levels is likely to take time," says Valecha from India Ratings.

Weaker investments, especially from the private sector, played a key role in falling profits during the previous financial year and the year till date. "Gross fixed capital formation growth has been 5 per cent-7.5 per cent over FY13-FY15 after growing in double digits over FY04-FY12, reflecting the sizeable unutilised capacity and leveraged balance sheets of corporates in India," adds Valecha

The recovery is definitely not round the corner, but how subdued the performance would be, remains to be seen ones all the results are out.   

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