Global commodity bust boosts India Inc’s profits

Nalinakanthi V BL Research Bureau | Updated on January 20, 2018 Published on May 01, 2016



Lower raw material costs shore up bottomline despite tepid revenue growth last quarter

The downward cycle in the global commodity market, which has severely impacted several economies, including the behemoth China, has come to the rescue of India Inc as the March quarter performance of companies that have declared results shows.

The aggregate operating profit of 156 companies (excluding banks and financials) that are listed on the Indian bourses and have announced results has grown by an impressive 17 per cent year-on-year.

Even as the larger economy continues to grapple with a demand slowdown, as evident from the tepid 2.6 per cent rise in revenue, the weakness in global commodity prices has been the saving grace for the import-dependent economy. The sharp correction in prices globally has helped India Inc save on its raw material cost.

The cost of raw materials as a proportion of revenue has come down from 33.6 per cent in the March 2015 quarter to 29.6 per cent last quarter. This helped the aggregate operating profit margin widen from 12.5 per cent in March 2015 to 14.3 per cent last quarter.

The reported profit was, however, impacted by exceptional items (write-offs) made by Cairn India and Vedanta, owing to the global weakness in crude oil prices.

For the fiscal year 2015-16, the aggregate operating profit growth of these 156 companies stood at 7 per cent, compared with 2014-15. This is despite a 5 per cent fall in revenue. This aided the 2.2 percentage point improvement in operating profit margins to 19.3 per cent.

Sectors that gained

Which are the sectors that fared well? Companies in the auto ancillaries, agrochemicals, pharmaceuticals, FMCG, and oil and gas space witnessed healthy growth in revenue and profit during the March quarter. Falling raw material prices helped ancillaries make tidy gains.

For agrochemical companies, it was hopes of a better monsoon this season and saving on input costs that aided performance. Likewise, cheaper raw materials lifted the profits of FMCG players even as volume off-take remained weak.

The laggards

Cyclical sectors such as infrastructure, real estate, engineering and construction continued to reel under losses in the March quarter, too. Funding and execution issues continue to pose challenges to these sectors.

While IT companies managed healthy revenue and profit growth on a year-on-year basis, the performance was sedate on a sequential basis, compared to the December 2015 quarter.

A consumption slowdown in key markets such as the European Union and the US and the resultant cut in IT spends impacted performance.

Also, a slowdown in sectors such as manufacturing, banking and financial services and telecom globally, which constitute a large chunk of the clientele for Indian IT majors, also posed challenges.

The quarter has been a mixed bag for private banks; Public sector banks are yet to declare their results. HDFC Bank, YES Bank and IndusInd Bank have managed a good show amidst credit growth and asset quality concerns. The loan book of these banks witnessed strong double digit growth in the March quarter.

However, higher exposure to troubled sectors did not augur well for Axis Bank and ICICI Bank. While both managed to deliver strong loan growth and keep margins intact, asset quality remained a concern.

For instance, a provision of ₹3,600 crore as a contingency reserve led to a 76 per cent slide in ICICI Bank’s net profit during the quarter. More pain is expected in the coming quarters.

(With inputs from Radhika Merwin and Rajalakshmi Nirmal)

Published on May 01, 2016
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