Corporate revenue growth to bottom out in Q3: CRISIL Research

Expect gradual recovery in IT, pharma, textiles besides consumption linked areas

After rebounding in the September quarter, corporate revenues are expected to bottom out in the December quarter of FY14, while the profitability of companies will continue to remain under pressure, said CRISIL Research in a note.

CRISIL expects India Inc's revenues, excluding financial services and oil firms, to grow by seven to nine per cent on a year-on-year (y-o-y) basis during the December quarter.

According to the research firm, from the December quarter onwards, growth will be broad-based instead of being concentrated only in a few sectors. The rise in revenues, though, would not translate to higher profitability. Ebitda (earnings before interest, taxes, depreciation and amortisation) margins during the quarter are estimated to remain stable at 17 per cent, y-o-y, CRISIL said.

Mukesh Agarwal, president of CRISIL Research, said: “From the third quarter of 2013-14, though, we expect a gradual recovery in more sectors. Apart from IT, pharmaceuticals and textiles, domestic consumption-linked sectors will see moderate improvement as rural demand picks up owing to a better monsoon. Also, while growth in investment-linked sectors will remain weak, unlike in the last many quarters, it is not expected to deteriorate further.”

Agarwal said a more sustained recovery is expected only in 2014-15, spurred by investments in projects fast-tracked by the Cabinet Committee on Investments, and lifting of the mining ban by the government.

In the third quarter of FY14, the research firm expects one-third of the 50 sectors (encompassing 605 companies) covered in this analysis to clock double-digit growth.

According to CRISIL Research, profit margins are expected to remain under pressure.

“Margin expansion is not expected until pricing power returns, which we do not expect before FY15. In the third quarter of 2013-14, margins of sectors such as IT and pharmaceuticals will increase by 80-100 basis points (bps) due to a weak rupee. Margins of the telecom sector will improve by 70 bps and that of the two-wheeler sector will rise by about 100 bps, led by higher realisations,” said Prasad Koparkar, senior director at CRISIL Research. However, Koparkar added that margins of the cement, power, airlines and paper sectors would decline because of high input costs.

Due to muted Ebitda growth and high interest costs, net profit margins, which declined by about 300 bps in the second quarter of FY14, are expected to remain under pressure in the third quarter, particularly of sectors such as construction, housing, metals, telecom and capital goods, CRISIL noted.