Consumption blues

Tax cut helps, but India Inc's revenue growth falters

An examination of the second-quarter results released to date indicates that the slowdown continues, though the corporate tax cut has helped boost profitability. A total of 316 companies, each with net sales of over a minimum threshold of Rs 10 crore, have released results so far. This set includes many sector leaders. For this sample, sales and revenues, including other income, grew at the lowest pace in three years with sales rising 4 per cent compared to July-September 2018, while revenues grew at 6.86 per cent. This is significant for a sample that registered revenues of Rs 9.66 trillion. 

Expenditure has grown at a comparatively slow rate, at 3.2 per cent, year-on-year (y-o-y), probably due to the drop in global commodity and energy prices. The tax incidence has fallen 2.4 per cent y-o-y, indicating that the tax cut has helped the bottom line. Lower costs have meant better margins, as operating profit (profit before depreciation, interest, and tax) has gone up 14.6 per cent, while reported profit after tax has risen 14.7 per cent. However, after adjusting for extraordinary items, profit after tax (PAT) growth has dropped to a much less impressive 6.75 per cent. All these ratios were considerably lower than in September 2018 versus September 2017, where, for instance, reported PAT was up 22 per cent while revenues grew at 28 per cent for the same sample. 

The results of this sample are also skewed by the disproportionate contributions of Reliance Industries (RIL), the three information technology (IT) majors — TCS, Infosys, and Wipro — and the private banks. Outside the financial sector, and excluding RIL, revenues have grown at less than 3 per cent, clearly indicating that consumption demand remains weak. The positive effect of the tax cut on earnings will, therefore, dissipate unless consumption picks up quickly. In terms of specific sectors, there are a few surprises and some of those are negative. The IT sector registered its lowest sales and profit growth in at least six quarters. The IT majors also issued advisories warning that the global demand for IT services was going to be slow, owing to the impending economic slowdown. 

Among the automobile majors that have declared results, only Bajaj Auto has generated a significant improvement in profits, while they have all registered volume growth decline. However, Tata Motors has cut its losses considerably. The other bellwether of domestic consumption, the fast-moving consumer goods sector, has also shown a low top line growth rate of 5.6 per cent so far, although profits are up by 19.2 per cent.

Many pharma majors have not declared results yet but the sector as a whole seems to have done quite well, with 11 per cent growth in revenues and 23.9 per cent growth in adjusted net profits. The private banks have shown an improvement in their workings and so has State Bank of India, which is the only major public sector bank to declare results so far. However, non-banking financial companies (NBFCs) have shown signs of the ongoing stress. With as many as 36 NBFCs having declared results, profits adjusted for extraordinary items are down 39.3 per cent for the sample. 

It will be difficult to extrapolate trends in the banking and energy sectors until the major PSUs declare results. However, in other sectors, the demand slowdown is now headed into its sixth successive quarter. The corporate tax rate has boosted earnings for profitable companies but hasn’t triggered volume expansion. More focused policy action would be required to inject animal spirits back into the economy.