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BW Businessworld

Caution And Cheer, A Bit Of Both

Corporate India is celebrating positive growth. Don’t be overjoyed, not yet

Photo Credit : Shutterstock


India Inc.’s power drive is beginning to rev up – and about time, too. After the BJP-led NDA government (read, Modi) swept to power in 2014, corporate performance in fiscal year 2017 has turned out to be stellar, building on the slow and resolute rise in the growth narrative.

Analysis of standalone figures of companies that have declared results for 2017 (excluding finance, 869 in all), reveals that this year’s revenue and profit growth has come at 7 and 17 per cent, respectively. Contrastingly, fiscal 2016’s revenues were flat, while profits rose a restrained 7 per cent (See table: ‘The growth is showing’).

Such a high level of recovery was not seen in fiscal 2015, the first full year of the Modi government. In that fiscal, revenues were down 1.25 per cent, and profits 0.25 per cent, from figures aggregated by BW research. As these are only for standalone performance (not consolidated), they may fall a soupcon short of reflecting the true picture.

Nevertheless, the growth trend-lines are apparent, as profitability has been stepping up over the years. Finally, the wheels of the economy are turning – and how! Will this growth persist? Judging by the barometer that closely tracks the performance of India Inc., that is, the stock market, such optimism is sky high.

Thumbs Up
At the time of writing, the BSE Sensex is at a record high of over 31000 points. In the past year, the bellwether index gained 16.9 per cent. The broad-based S&P BSE 500 is also hovering at an all-time high of 13271 points. This index, too, has delivered all-star returns of nearly 23.4 per cent in the past year.

Brokerages, too, are reporting similar growth trends in India Inc.’s performance. The latest research report from Motilal Oswal points out that the Nifty, comprising large-cap stocks, has rounded off FY17 with 8 per cent growth. But it’s in the broader MOSL universe of stocks where the optimistic picture really emerges, and concurs with the financial figures crunched by BW research. The broader MOSL universe posted 15 per cent earnings growth in FY17.

On a broader level and expanding the number-crunching to nearly all companies that have declared results for the fourth quarter (869 in all), profit growth has come at 4.3 per cent, while Q4 FY17 revenue growth registered a 12 per cent increase over the previous quarter. Only a crumb better than last year, as  most of the small companies are showing their true colours after demonetisation. However, the larger companies have not been so badly bruised by the currency crisis. The figures show that some sectors such as private banks and the oil & gas sector bypassed the effects of demonetisation altogether.

Says Sunil Sharma, executive director and CIO, Sanctum Wealth Management, “The fourth quarter results have come in marginally better than expected, and earnings growth is expected to pick-up gradually from here on.” Of course, the factors that have driven India Inc.’s performance a notch higher are a recovery in commodity prices, lower oil prices and a better-than-expected performance of auto and other consumption sectors. Some of the private sector banks and NBFCs have reported reasonably good figures.

Smoke and Mirrors?
Still, it’s not all hunky dory. The good figures are confined to some of the cyclical and commodity driven sectors. Says Vinod Karki, VP, strategy, ICICI Securities, “For the Nifty companies, the bulk of the heavy lifting in terms of earnings growth has been due to commodities. This may not be sustainable.” So far, performances of IT and pharma have not been up to par. Commodity-driven sectors, though, such as oil & gas and metals are roaring back. Hence, this disparity in the performances of cyclicals makes overall figures appear far better than they should.

Continues Karki: “Overall, net profit growth for the Nifty in Q4 FY17 is a mixed bag. It is not a true representative of the underlying growth in corporate India as there is significant volatility among the constituents. Nevertheless, Nifty PAT growth in Q4 FY17 was 5.9 per cent; excluding commodities and financials, it was 2.6 per cent.”

If the sectoral performance is seeing a wide divergence with certain sectors outperforming by the distance, the stock markets too are exhibiting contrasting person. For example, despite reporting good numbers, certain stocks tanked. Others that have reported below-par performance have seen their stock prices rise. “Stock prices do not necessarily reflect the results in many cases,” says Karan Bharadwaj, director, Wealth Vertical. “Stocks have sometimes moved in opposite ways, contrary to the results. Only in the case of autos, stock-price movements seem to have reflected the results.”

Still, companies such as Tata Steel have benefited immensely from the recovery in commodity prices. Its standalone net profit rose 171 per cent to Rs 1,415 crore, while JSW posted a similar hike in net profit, growing 173 per cent to Rs 1,003 crore. Vedanta’s consolidated net profit surged three-fold to Rs 2,988 crore. For now, though, commodity prices are going through a mini recovery of sorts. Some of this, though, is on the lower base of last year.

Autos, on the other hand, delivered stellar results, with overall revenues growing at 8 per cent and net profits rising 5 per cent. Maruti, and Mahindra & Mahindra clocked 17.3 and 26 per cent profit growth, respectively. Tata Motors’ profit, however, dipped 17 per cent (on account of provisioning and write-offs).

The Bitter Pill
A sector that seems to have lost its mojo is healthcare. Its Q4 revenue growth has been flat at 0.3 per cent, while profit growth plunged, by 16.5 per cent. In fact, the healthcare sector has posted one of its worst quarterly performances over the last two years. Sun Pharma, reported a 13.6 per cent drop in Q4 net profit to Rs 1,224 crore. Cipla, too, posted a net loss of Rs 61.7 crore, though this was less than last year’s Rs 92.83 crore loss.

What’s next for India Inc.? Is it going to be a mixed bag or will there be a pick-up in growth overall? Analysts are expecting the pick-up in earnings growth to be around 18-20 per cent if commodity prices rise a little and do not impact overall demand trends in consumption. Industry experts expect the GST to be a big game-changer too.

Analysts also expect that some of the demand last year (muted due to the demonetisation) could come roaring back this year. Further, the government is spending way more on infrastructure this year, which should result in incomes swelling. Commodity prices might be buoyant, and boost the figures. Indian companies are also seeing lower interest rates. Demonetisation has driven the 10-year G-Sec yield to 6.6 per cent; so that should result in cost savings.

Let’s also face it. With crude oil prices at very comfortable levels for India Inc., the gods have been kind over the last three years of the present regime. Now that the engines have fired, the next step is to check if we can move the gear shift further - only then can India Inc. roar ahead.