 "Gain for exporters, pain for the rest")
The first batch of results for the June quarter has been a mixed bag. While profitability of export-intensive sectors, such as information technology (IT), surprised on the upside, a demand slowdown seemed to be spreading to the financial sector, especially private banks.
A better-than-expected show by IT biggies like Tata Consultancy Services and Infosys lifted the core operating margin (excluding other income) of non-financial companies by 80 basis points on a year-on-year basis, despite stagnant revenues and double-digit increase in wage cost. Currency depreciation helped IT companies and manufacturing exporters like Bajaj Auto to book higher rupee revenues and cushioned the blow from rising operating cost in India.
A total of 123 companies have declared their first-quarter results so far. Of those, 99 are non-financial companies, while the rest are banks, non-banking financial companies (NBFCs) and brokerages (clubbed as financials).
“The trend suggests this quarter may belong to companies with dollar-denominated revenues. Rupee depreciation is helping exporters cushion the blow from a demand slowdown in India, besides helping margins,” says Devang Mehta, senior vice-president and head (equity sales), Anand Rathi Financial Services. The stock market has reacted accordingly, with a sharp correction in banking stocks. Not surprisingly, IT, pharma and FMCG stocks have led the rally during the month.
The biggest surprise of the quarter, however, has been the relative poor performance by private sector banks, so far insulated from the broader slowdown. “While the sector was expected to face some headwinds from a weaker rupee and slowdown in lending, a rise in gross NPAs and fall in provisioning ratios of a couple of marquee names came as a shocker and hinted at the challenges facing the sector,” says Dhananjay Sinha, co-head (institutional equity), Emkay Global Financial Services.
At 24.7 per cent, banks’ net interest income grew at its fastest pace in 10 quarters but this was largely due to lower interest expense, and not faster growth in interest income. At 13.6 per cent and 7.8 per cent, respectively, interest income and interest expense grew at their slowest pace in the past three years, clearly indicating the sharp deceleration in offtake of new loans. Sinha expects more bad news from the banking and NBFC space as the central bank tightens monetary policy to fight the rupee depreciation and discretionary consumer spending slows.
The rest of the Indian companies continue to be in the throes of slowdown, with the rate of non-financial companies’ revenue growth (up one per cent y-o-y) falling to its lowest level in 13 quarters.
Adjusted for inflation, it indicates a sharp deceleration in sales volume and a further fall in capacity utilisation across industries. This is seconded by raw material cost - down 6.8 per cent y-o-y - despite the rupee’s depreciation. This indicates a fall in production of goods and services. The only saving grace has been a double-digit increase in wage bill (up 18.8 per cent y-o-y) that is likely to cushion the blow for households and help FMCG companies. But it could also hint at a wage-push cost inflation, as employees demand higher wages to protect their purchasing power from double-digit retail inflation. This might further depress corporate profitability, if demand growth remains anaemic.
As core revenues stagnated, many companies resorted to treasury operations and non-core activities to shore up their profitability. This was visible in the widening gap between core operating profit (excluding other income) and Ebitda margins (that includes all revenues). Other income was up 21.2 per cent in the quarter and accounted for a fifth of operating profits, against less than 10 per cent three years ago.
A better-than-expected show by IT biggies like Tata Consultancy Services and Infosys lifted the core operating margin (excluding other income) of non-financial companies by 80 basis points on a year-on-year basis, despite stagnant revenues and double-digit increase in wage cost. Currency depreciation helped IT companies and manufacturing exporters like Bajaj Auto to book higher rupee revenues and cushioned the blow from rising operating cost in India.
A total of 123 companies have declared their first-quarter results so far. Of those, 99 are non-financial companies, while the rest are banks, non-banking financial companies (NBFCs) and brokerages (clubbed as financials).
“The trend suggests this quarter may belong to companies with dollar-denominated revenues. Rupee depreciation is helping exporters cushion the blow from a demand slowdown in India, besides helping margins,” says Devang Mehta, senior vice-president and head (equity sales), Anand Rathi Financial Services. The stock market has reacted accordingly, with a sharp correction in banking stocks. Not surprisingly, IT, pharma and FMCG stocks have led the rally during the month.
The biggest surprise of the quarter, however, has been the relative poor performance by private sector banks, so far insulated from the broader slowdown. “While the sector was expected to face some headwinds from a weaker rupee and slowdown in lending, a rise in gross NPAs and fall in provisioning ratios of a couple of marquee names came as a shocker and hinted at the challenges facing the sector,” says Dhananjay Sinha, co-head (institutional equity), Emkay Global Financial Services.
At 24.7 per cent, banks’ net interest income grew at its fastest pace in 10 quarters but this was largely due to lower interest expense, and not faster growth in interest income. At 13.6 per cent and 7.8 per cent, respectively, interest income and interest expense grew at their slowest pace in the past three years, clearly indicating the sharp deceleration in offtake of new loans. Sinha expects more bad news from the banking and NBFC space as the central bank tightens monetary policy to fight the rupee depreciation and discretionary consumer spending slows.
The rest of the Indian companies continue to be in the throes of slowdown, with the rate of non-financial companies’ revenue growth (up one per cent y-o-y) falling to its lowest level in 13 quarters.
Adjusted for inflation, it indicates a sharp deceleration in sales volume and a further fall in capacity utilisation across industries. This is seconded by raw material cost - down 6.8 per cent y-o-y - despite the rupee’s depreciation. This indicates a fall in production of goods and services. The only saving grace has been a double-digit increase in wage bill (up 18.8 per cent y-o-y) that is likely to cushion the blow for households and help FMCG companies. But it could also hint at a wage-push cost inflation, as employees demand higher wages to protect their purchasing power from double-digit retail inflation. This might further depress corporate profitability, if demand growth remains anaemic.
As core revenues stagnated, many companies resorted to treasury operations and non-core activities to shore up their profitability. This was visible in the widening gap between core operating profit (excluding other income) and Ebitda margins (that includes all revenues). Other income was up 21.2 per cent in the quarter and accounted for a fifth of operating profits, against less than 10 per cent three years ago.