India Inc. Pulls Through

If the recent december quarter results are an indication, India Inc., did not shiver through a wintery financial landscape after all. The impact of demonetisation has been restrained, while India, Inc., appears to have put up a much better show overall. During the initial days of the de-monetisation, gross domestic product (GDP) estimates were being cut drastically and analysts even expected GDP growth to slip below the five per cent mark.

Markets expected profits of India, Inc., to dip substantially as consumption of some white goods, discretionary and utility companies shrank drastically.

But, it turns out, the figures are much plumper. An analysis of 1,275 companies which reported third quarter FY17 results proves otherwise. Year on year (y-o-y) revenue growth, at 8.6 per cent, has been higher. To gauge the impact of the demonetisation, growth figures were calculated for companies with revenues of more than Rs 50 crore. No contraction has been seen.

In fact, profit growth has surged sharply. The December quarter net profit for the companies analysed by BW Research zoomed 19 per cent over the corresponding previous year quarter. This, of course, could be attributed to the lower base.

However, quarter on quarter (q-o-q) figures have slightly declined. Profit growth in the December FY17 quarter dipped a mere 3.5 per cent. This stemmed from interest costs increasing over the last quarter. Quarter on quarter (q-o-q) revenue figures rose 4.6 per cent over the September quarter due to higher realisations.

Operating profit q-o-q, according to the figures available with BW, were flat as businesses felt the pinch of a contracting economy, and operating leverage was thereby unavailable. Still, y-o-y operating profit jumped a remarkable 11.8 per cent in the December quarter. It’s the lower base of last year and a lower cost increase that appear to have buoyed up operating profit.

The impact of the demonetisation was not as widespread as expected. Sector-wise, too, apart from a few rural consumption sectors, by and large four-wheelers accelerated. Some of the sectors that led the earnings growth have been commodity companies, particularly metals and oil and gas companies. Internationally, commodity prices have been on an upswing, driving revenue growth of select sectors.

Year-on-year operating-profit increases have again been led by metals, oil and gas and capital goods. Sectors such as capital goods are showing the impact of improving macro-economic conditions as operating-profit leverage kicks in due to better capacity utilisation.

The sectors again at the forefront of profit growth were metals and commodities. Oil and gas also contributed significantly to profit increases.

Only sectors which usually command a great amount of cash transactions such as cement, consumer discretionary and autos, have experienced a small drop in revenue. But these segments still seemed to have held up. To some extent, retail consumption has now shifted to the formal economy. Sales at large retailers have surged due to the demonetisation as people have begun using cards rather than cash.

Last year’s distressed sector, such as banking, recovered lost ground, having sailed through the choppy days of the demonetisation. In fact, most banks reported handsome gains in CASA, or low-cost deposits. That apart, as much of the heavy provisioning made last year has been done and dusted off; lower provisioning meant higher profits in the last quarter. On an average, profit growth has zoomed by more than 800 per cent, from Rs 1,117.3 crore in the December ‘15 quarter to Rs 10,412.09 crore a year later.

Banks did not grow their topline much because interest income only inched up. Overall, revenues increased a mere 7.3 per cent in the same period. Credit growth seemed to have taken a beating, post-demonetisation, as consumption in key sectors such as automobiles contracted. This in turn seemed to have an impact on asset quality.

Gross non-performing assets shot up 61 per cent over the previous December quarter to Rs 593,013 crore in December ‘16. Net non-performing assets swelled 59 per cent over the previous December. The broader market, however, anticipates a strong banking-sector performance due to a likely pickup in infrastructure lending, lower interest rates, low provisioning and rising credit recoveries.

However, companies in the bellwether Sensex reported an aggregate y-o-y sales improvement of 3.8 per cent, while net profit increased by a mere one per cent, against an estimated six per cent, broadening of the bottom line. Hence, some of the demonetisation impact has been seen on the frontliners.



In the coming quarters, however, earnings growth is expected to recover a whit, boosted by improving commodity prices and following from the lower base of core-sector companies. For FY17, analysts have cut back on earnings estimates in the bellwether index.

But will the demonetisation impact recovery in the coming years? Contrary to popular expectations, demonetisation seems to have passed by without any major damage to corporate profitability.

Some of the large companies are seeing somewhat of a bumpy recovery; hence, analysts have downgraded earnings estimates for FY18 by around two per cent. Brokerage Motilal Oswal expects Sensex EPS to come in 3.2 per cent lower, at Rs 1,317 in FY 17 and two per cent lower at Rs 1,634 in FY18.

Though not much good news appears to be coming in the next financial year, the impact of the demonetisation is likely to be a temporary blip in consumption, rather than any long-term change in trend. If the retail credit growth, GST rollout and infrastructure spending are any indicators, India, Inc., should soon see business as usual.