Disappointing turn

Big-ticket consumption, investment slowed in Q3

Corporate results in the third quarter (Q3) of the current financial year (FY19) show a pattern of slowdown and falling margins. This confirms fears expressed by the Monetary Policy Committee of the Reserve Bank of India in its February policy review, in which it pointed to contractions in vehicles sales, lower capital goods production, deceleration in industrial activity, lower air passenger traffic, etc to suggest “moderation in economic activity”. A Business Standard analysis of 2,338 companies that have declared results for Q3 shows the software and IT segments did well, and fast-moving consumer goods majors also met expectations. Metals and mining did reasonably well, though the future may be cloudy for this sector. The key sectors of banking and finance continue to be under heavy pressure.

Combined net profit was down 28 per cent year-on-year (YoY) compared to Q3 FY18 for this sample. Revenues rose by 17 per cent YoY, which was a sequential slowdown from 19.6 per cent growth in Q2 (July-September 2018). Adjusted for exceptional items, net profits were up 2.2 per cent YoY. If the volatile oil and gas and finance sectors (including banks and non-banking financial companies) are excluded, the combined net profits of the remaining 2,005 companies were down 39.7 per cent to Rs 47,500 crore. This is the worst showing in the last three years. As many as 701 companies suffered losses, and heavy losers included Tata Motors, Vodafone Idea, Punj Lloyd and Adani Power. Expenses grew faster than revenues for the sample, with operating margins down by 3 per cent to 12.9 per cent.

 

IT companies saw revenue gains of 16 per cent though net profits grew by only 6.7 per cent. This is due to the weaker rupee. The metals and mining segment saw profits rise by over 32 per cent. But global commodity prices fell in January-February due to the slowdown in China and so these margins may not be sustainable. The pharmaceutical industry is under pressure on several fronts because of the US Food and Drug Administration continuing with stringent checks of export facilities and a long list of drugs placed under pricing control. The quarter was also difficult for the oil and gas sector. Crude oil prices were high through October and November before falling sharply in December. Refining margins were lower. Though combined revenues rose by 34 per cent, net profits fell 16. 6 per cent. In the crucial finance sector, the banks which have declared results so far saw credit growth of 15 per cent and combined net profits up to Rs 900 crore from a loss of Rs 6,000 crore in Q3 FY18. The worst may be over, even though Bank of India, IDBI Bank, Bank of Maharashtra, United Bank of India, UCO Bank and IDFC First Bank posted net losses. However, the NBFCs declared flat revenues and net profits dropped by 11.7 per cent.

The conclusions are that big-ticket consumption has slowed and the low demand for capital goods indicates investment has also tapered off. Rural consumption was hurt by low food prices. Government expenditure helped keep things on an even keel. Election-related spending may help to reignite private consumption demand. It remains to be seen if this is a cyclical low or if major structural issues are causing the slowdown.