CRISIL Research, India’s largest independent and integrated research house, foresees revenue growth of India Inc. rising to a two-year high of 8% (year-on-year) in the quarter ended June 30, 2016. The first sign of topline growth shifting to a higher trajectory was seen in the March quarter, when it surged to 6.5% from a drab 1-3% seen in each of the five quarters preceding.
To be sure, revenue growth remains significantly lower than the long-term average of 12-15%. However, in real terms – or adjusted for inflation – the picture looks brighter because topline growth is likely to be higher than the average for the last 4 years.
Ebidta (earnings before interest, tax, depreciation and amortisation) is seen up ~13%, slower than the 17% jump seen in the March quarter, but well above 2.5% growth in June 2015. There could also be some surprises in accounting treatment because companies with a net worth of over Rs 500 crore would be migrating to Indian Accounting Standards from the June 2016 quarter. The analysis is based on 600 companies (excluding financials and oil & gas) that account for ~70% of the market capitalisation of the National Stock Exchange.
From an emerging market perspective, this means domestic companies are growing way faster than peers in China, South Korea, Taiwan and South Africa. The contrast couldn’t have been starker: while the financial performance of India Inc is improving, aggregate revenues and Ebitda of companies that are part of the MSCI Emerging Market Index have been swinging the other way, having declined in each of the past 6 quarters.
And to sustain the higher earnings trajectory, three domestic tailwinds are necessary: a normal and well-distributed monsoon, a gradual revival in investment sentiment, and ever-increasing job creation. Global factors are unlikely to be supportive, and risks have risen further after Britain decided to leave the European Union, or the so-called Brexit.
Says Prasad Koparkar, Senior Director, CRISIL Research, “Urban domestic plays and some export-oriented sectors are expected to drive topline growth this time. We expect IT services industry to report 15% revenue growth on the back of volume growth and the 5% depreciation in the rupee against the dollar. Brexit headwinds though will cast some shadow on future growth of the sector. In pharmaceuticals, new launches from a strong product pipeline will propel 15% growth. Among consumption-oriented sectors, organised retailers, consumer durables and two-wheeler makers are likely to do well, fuelled by strong demand in urban areas. But for FMCGs, growth is likely to be tepid dragged by insipid demand in hinterland, from where half of revenue comes.”
Among investment-linked sectors, cement producers are likely to report 6-7% growth in volume, indicating some benefits from pick up in government aided construction activity. But revenue growth would be just 1-2% as prices are down in most regions except in north and central India.
Reflecting the pick-up in project execution, construction companies will too witness a moderate 7-8% revenue growth, better than the 5% seen last fiscal. For capital goods makers, though, lack of broad-based capex recovery continues to hurt with revenues likely to decline by 5%. Electricity generation companies, on the other hand, could see a moderate 6-8% growth with the commissioning of some new units and increase in plant load factor following a gradual pick-up in demand.
Says Ajay Srinivasan, Director, CRISIL Research, “As for profitability, commercial vehicle and two-wheeler makers, electricity generation companies and airlines are expected to do well on lower raw material costs. For cement companies, decline in power and fuel costs would increase Ebidta margin by 70-80 basis points (bps). Sugar mills are likely to see their profits zoom after a 35-40% increase in domestic prices. Interestingly, the capital goods industry is likely to see 150-200 bps improvement in margin due to increased localised sourcing and cost rationalisation.”
IT companies could see a 40 bps contraction in Ebidta margin due to pressure on blended realisation, stagnant utilisation rates and higher investment in the digital space. Drug makers, too, would be under pressure after spending on plant remediation activities following regulatory scrutiny, higher R&D expenses (for large players), and high-base effect of last year (for mid-sized players). Tyre manufacturers face ~250 bps margin deflation because realisations have slumped amid rising competition.