Economy

India Inc’s Q1 earnings signal revival of demand

Parvatha Vardhini C BL Research Bureau | Updated on January 18, 2018

q1-growth

Net sales for 400-odd firms grew 2.3% in June quarter as key sectors post double-digit growth

Demand for goods and services is picking up, if one were to go by the initial set of results for the June quarter.

For the second quarter in a row, Corporate India continues to show a growth in the top line. This is after several quarters of lacklustre demand.

Following the low single-digit growth in the March 2016 quarter, net sales for about 400-odd companies, which have announced their numbers so far, grew 2.3 per cent in the June quarter. Adjusted net profits grew 11.6 per cent over the same quarter last year.

With ‘other income’ from non-core operations such as treasury and/or sale of assets showing a marginal fall from the year-ago period, profit growth was aided by stronger operational performance. Banking and finance companies have been excluded for this analysis. Consolidated numbers have been taken wherever applicable.

Sectors that stood out

Urban consumption, which has been showing signs of a pick-up in recent quarters, has had its trickle down effect this time too. Many companies in sectors such as automobiles, consumer durables, media and entertainment, cement and ceramics have shown double-digit growth in both sales and profits. What’s more heartening is that reforms in sectors such as mining, and infrastructure segments like roads and power are beginning to reflect in the numbers of companies in this space.

Larsen and Toubro, for instance, recorded a 9 per cent growth in sales and 45 per cent growth in adjusted profits. L&T received a solid order inflow of about ₹29,700 crore in the first quarter, a 14 per cent rise over the previous year.

Players in the electrical equipment space, such as ABB, KEC International, and other capital goods companies like Wendt India, Ingersoll Rand and Grindwell Norton did well too. Commodity players saw good tidings as well, with companies such as JSW Steel benefiting from the revival in steel prices. It was a mixed bag for IT companies though, as they faced headwinds from a slowdown in global markets on the one hand, and benefited from a depreciating rupee on the other. As in the previous quarters, rural demand continued to remain tepid.

For instance, Hindustan Unilever, which derives 45-50 per cent of its revenues from rural areas, recorded its lowest level of volume growth in the last six quarters, and consequently unimpressive results. Fertiliser players fared weakly too.

Cushion for profit growth

Despite the tepid sales growth of less than 3 per cent recorded by these 400-odd companies, what provided cushion in the quarter for profit growth, as in the previous periods, is the relief on the raw material front. Raw material as a percentage of sales stood at 42.1 per cent against 44.1 per cent in the June 2015 quarter. Consequently, operating margin expanded to 20.2 per cent from 18.8 per cent a year ago. Cheaper borrowing costs also contributed to the bottom line. Interest costs for the quarter inched up only by a marginal 1.1 per cent for these companies, while interest cover expanded to 7.1 times from 6.6 times in the three months ended June 2015.

Do note that this is only the initial take and the final picture can change when all the numbers are in. Also, the cushion for profit growth from cheap raw materials may not be available in the quarters to come. A reversal from rock-bottom prices seen in many inputs as well as the base effect could limit the expansion in operating profits and margins of India Inc in future, unless sales improve further. A stronger revival in demand is the need of the hour.

Published on July 31, 2016

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