India Inc Q2 preview: Consumption demand, low base set for rescue act


Corporate India, whose slow and modest recovery since March quarter came from a cost squeeze rather than a pick-up in demand or pricing power, might have witnessed some acceleration in both revenue and earnings in the September quarter, partly aided by a rise in urban and rural consumption, analysts reckon.

While rating agency Crisil has predicted Q2 revenues of 360 firms in “key sectors” to grow an annual 7% — compared with 6% in June quarter and between 0-2% in four of the past six quarters — on the strength of automobile, retail, pharma and IT companies, Kotak Institutional Equities (KIE) saw net profits of 182 firms tracked increase 15.3% year-on-year and that of Sensex firms, 4%. The aggregate revenue growth of a basket of 2,045 companies in the June quarter was just 3.2% y-o-y, exclusive of Rajesh Exports, which took the figure to a more respectable 9.2% thanks to an acquisition made in July 2015. While consumption by the government was a major driver of economic growth in June quarter, pay increases for its staff and a normal monsoon seem to have supported it in the second quarter of the financial year. However, given the 3.1% decline in additional capital investments in Q1 and a fiscally stressed government’s constraints in keeping the public investment momentum, even the latest corporate results previews are only a stark pointer to the urgency of private investments.

Both Crisil and KIE feel Ebidta (earnings before interest, tax, depreciation and amortisation) margins of India Inc may have improved in September quarter — by 50 bps y-o-y across key sectors, according to the former and by 1.8 percentage points in case of KIE firms. Thanks to the jump in earnings of downstream oil companies, which are rid of subsidy burden, KIE universe’s net profits are estimated to have risen 15.3% y-o-y in Q2 on a moderate 4% increase in sales. Banking sector is seen to have dragged the overall earnings of firms, bound as they are by the high provisions for bad loans. However, on a sequential basis, Ebidta and net income of KIE companies are seen to have declined in Q2, by 6.2% and 5.7% respectively. Even the yoy growth predicted in Q2 revenue is helped by a low-base effect and, as in the previous couple of quarters, low commodity prices.

Prasad Koparkar, senior director, CRISIL Research, wrote: “We see automobiles reporting 13% (revenue) growth riding on new launches and healthy rural demand following a good monsoon. Retail is expected to grow 12% on the back of improvement in disposable incomes and India’s economic outlook, while pharmaceuticals, driven by new launches in the US, should see 13% growth. IT services sector is expected to grow 10%, slower than in the past, aided by volume and rupee depreciation.” The rating agency has estimated on the basis of analysis of the 500+ companies across 50 sectors that India Inc’s ebidta margin had improved to 20% in June quarter from 19.4% in the year-ago quarter. It reckons that key sectors’ operating margin would improve further in Q2FY17. Binaifer Jehani, Director, Crisil Research wrote: “During the second quarter, automobiles, steel products, telecom services and FMCG companies are expected to improve their Ebidta margins. For steel products makers, it is seen up 150 bps riding on a 2-4% increase in prices. For auto makers, we see it rising 125 bps. For FMCGs, it should rise 80 bps with input costs, especially crude oil and copra prices, declining.”

Giving sector-wise analysis, KIE said: “We expect auto companies under our coverage universe to report 35% yoy growth in net profits, led by 11% yoy revenue growth and 90 bps yoy expansion in ebidta margin. Strong growth in net profit is partly led by sharp improvement in consolidated profit of Tata Motors due to low base (+76% yoy).” The firm expects a strong quarter particularly from Eicher Motors, Hero Motocorp, Maruti Suzuki, Tata Motors and TVS Motors. As for banks, earnings will likely decline 15% yoy, KIE wrote. “We see public banks reporting lower slippages qoq, but high provisions will continue, while Axis/ICICI Bank will likely see very weak results on slippages. Large treasury gains will be primarily used to improve coverage.” In case of NBFCs,

It expects q-o-q stable trends in growth and profitability. “Most NBFCs are looking forward to 2HFY17 with optimism although they have not seen much of a pick-up during 2QFY17. We do not see significant change in NIM qoq (baring seasonal variations) as gradual re-pricing down of liabilities is getting passed on as well in the form of lower yields. The decline in yields should be visible in 2H.”


The brokerage firm’s Q2 prognosis for consumer products companies is as follows: “For 2QFY17, we estimate aggregate revenue growth for KIE consumer universe to inch up a tad to 10% yoy, led by price hikes across several categories and pickup in discretionary revenues ahead of the festive season (strong growth in paints; jewellery led by higher gold prices). We model 30 bps yoy aggregate gross margin expansion (significantly lower versus 140-260 bps expansion witnessed over past six quarters). We expect ebidta and PAT growth of 13% for our consumer universe (ex-Nestle/ITC) aided by modest pickup in revenue growth, sustained benefits of RM tailwinds (though pace of benefits has narrowed significantly) and lower A&SP (aggregate A&SP spends to remain flattish yoy.”