Cost pressures weigh on Q2 revenues
India Inc to report double-digit revenue growth for fourth consecutive quarter

The earnings season that kicked off this week on a strong note may report 12 per cent year-on-year revenue growth, marking the fourth consecutive quarter of double-digit growth.

Of the handful of major companies that have reported September quarter results this week, IT major Infosys has surprised analysts with a strong 4.2 per cent quarter-on-quarter constant currency (CC) revenue growth in Q2, along with the highest volume growth in the last 10 quarters and highest ever large deal wins of $2 billion.

In the consumer space, market leader Hindustan Unilever reported robust volume growth of 10 per cent, revenue growth of 12 per cent and a 160 basis points expansion in operating margin.

Oil sector leader Reliance Industries reported its highest ever quarterly net profit on a 54.5 per cent jump in consolidated revenues. Its net profit was up 17.4 per cent.

Cement maker ACC reported a 15.20 per cent rise in consolidated net profit.

Two-wheeler-maker Hero Motocorp, however, disappointed the market with  a 40 bps drop in Ebitda margin to 15.2 per cent and a volume growth of 5 per cent.

DMart operator Avenue Supermarts also disappointed on margins with a steep drop to 8 per cent from 9.1 per cent YoY.

A Crisil Research preview of the September quarter earnings said corporate revenue growth, excluding banking, financial services, insurance (BFSI) and oil companies, would come to about 12 per cent year-on-year.

Broad-based recovery across consumption-linked sectors, coupled with higher commodity prices, is helping India Inc grow at a faster clip, it said.

“We expect most of the consumption-linked sectors to expand 10-15 per cent. The growth will be driven by continued positive momentum in consumer sentiment, a low base effect for certain sectors due to the goods and services tax (GST) rollout in the same quarter last fiscal, and growing rural demand.”

Commodity-linked sectors, such as steel products, natural gas and petrochemicals, will likely grow sharply due to increasing realisations. High volume-driven growth would continue in cement, led by ramp-up in capacities by several players and greater demand from increased government spending in the urban infrastructure and affordable housing space, it said.

However, firmer commodity prices coupled with a depreciating rupee is expected to put pressure on corporate margins. Even though improved demand will lead to topline growth, Crisil Research expects higher input costs to constrain margin expansion for India Inc this quarter.

On an overall basis, earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin would likely stay tepid with a marginal 10 bps increase. However, this is greatly supported by margin expansion in commodity-linked sectors such as steel products and petrochemicals.

Ex-steel, overall margins are expected to fall of 70 bps. Of the 20 major sectors, we expect margins to contract in 11 owing to cost pressures.

Higher commodity and raw material prices are expected to take a toll on margins, especially for large sectors such as airline services, aluminium, cement, and natural gas.

Domestic prices of coal, steel (long), steel (flat) and aluminium are expected to rise 15, 14, 17 and 12 per cent, respectively, on-year.

This would be coupled with a further 9 per cent on-year depreciation of the rupee in the quarter.

Additionally, the ability to pass on prices may be limited due to competitive pressures for airlines, cement and FMCG, further accentuating pressure on the margins. Conversely, steel products would benefit from significantly improved realisations, with the ability to pass-through any increase in input prices.

However, the rupee depreciation would limit margin erosion for export-linked sectors, especially IT services and pharma, the report said.

Here is the Crisil forecast for various sectors:

Revenue forecast

Automobiles: We expect revenue of key auto segments such as commercial vehicles (CVs), passenger vehicles and two-wheelers to grow at a robust pace. This is as volumes improve due to better domestic demand, supported by export growth for cars and two-wheelers. A change in product mix towards higher-priced vehicles is also aiding realisation growth. CV revenue is expected to grow 17 per cent, followed by cars at 6-8 per cent. Two-wheelers and tractors revenue should grow comparatively slower at 5-7 per cent and 3-5 per cent, respectively.

Fast-moving consumer goods: We expect aggregate revenue to improve 11 per cent on-year, riding on a pickup in consumer sentiment and growing rural demand due to a near normal monsoon. Product innovations, such as new product launches and change in packaging/size of units sold by certain companies, would also support.

IT services: Rupee depreciation would likely boost revenues for the sector with sharp depreciation of the currency in the quarter. This is further supported by an expectation of pickup in spending in the US market and robust growth of the digital services segment.

Pharmaceuticals:  Bulk drug players will likely enjoy robust 22 per cent on-year growth, led by increased penetration of products and regulatory clearance from the US FDA for the plant of a key player. While we expect large formulation players to grow at a slower 5-8 per cent, mid-sized players should clock 3-8 per cent revenue growth. A strong domestic market coupled with rupee depreciation would support revenues for both categories.

Steel products: Revenue is projected to increase 20-22 per cent on-year, primarily because of surging domestic steel prices (15-17 per cent) and healthy domestic demand growth of 5-6 per cent on-year. Domestic flat and long steel prices are estimated to rise 17 per cent and 14 per cent on-year, respectively, led by a spike in global steel prices and elevated raw material prices.

Telecom services: We expect gross revenues to drop 20 per cent amid continued strong competition. In addition, the cut in interconnect usage charges (IUC) from 14 paise/min to 6 paise/min (w.e.f October 2017) continues to impact revenues.

Ebitda margin

Airline services: Players will continue to face pressure on margins. This would be the result of rising crude prices coupled with a steep fall in the rupee and a limited ability to pass through the increase in costs due to stiff competition.

Automobiles: We expect Ebitda margins to contract 70 bps on-year, largely impacted by rising raw material costs. Margins of commercial vehicle players would expand by 150 bps owing to improved capacity utilisation. However, the margins of both cars and two-wheelers would likely contract by 110 bps and 240 bps, respectively.

Aluminium: Ebitda margin is forecast to contract 250-350 bps on-year, largely on account of rising raw material prices (alumina).

Cement: Ebitda margin is forecast to deteriorate 150-200 bps, led by higher power and fuel costs due to increasing prices of petcoke and increased dependence on imported coal. Rising diesel prices would also be impacting freight costs for the sector.

FMCG: Ebitda margin is expected to remain flat or marginally rise on-year. The rising prices of raw materials and increasing competition leading to increased promotional expenses will be offset by the benefit from higher operating leverage.

Pharmaceuticals: We project the Ebitda margin to contract 150-200 bps as pricing pressure continues in the US market and several players may incur added product development-related costs to gear up for future launches.

Steel products: Ebitda margins will expand by 750-800 bps on-year owing to healthy topline growth caused by elevated steel prices and healthy demand prospects.