CRISIL Research, India’s largest independent and integrated research house, expects the aggregate top line of companies in key sectors – excluding banking financial services and insurance (BFSI) and oil – to grow by ~7% on-year in the second quarter of the current fiscal. These sectors account for over 70% of the market capitalisation of NSE-listed companies (excluding BFSI and Oil).
The growth rides on higher commodity prices and a pickup in most consumption linked sectors. However, it remains range-bound at 6-8% for the seventh straight quarter since the breakout in Q4 FY16 from 0-2% in the preceding four quarters.
Says Prasad Koparkar, Senior Director, CRISIL Research, “Had it not been for telecom, India Inc. would have grown over 8% this quarter on the back of a 10-12% growth in select consumption driven sectors such as auto, airlines, retail, media. While delayed restocking post-GST will keep FMCG growth subdued, price wars continue to impact telecom incumbent’s revenues. However, higher realisations led growth in steel, aluminium and crude oil linked sectors will push up the overall average.”
Export-linked sectors such as IT and pharmaceuticals will continue to disappoint, amidst strengthening of the rupee over last one year, a surge in protectionism across the globe and pricing pressure in the US.
Most consumer-linked sectors that were impacted due to demonetisation and then destocking pre-GST are now showing signs of revival. The growth is expected to improve in key consumer-linked sectors, ex-FMCG and telecom, to an aggregate ~12% in Q2 FY18, as against an average of ~6% in the last three quarters. Slower restocking in FMCG continues to impact growth.
On the profitability front, a rise in inputs costs and pricing pressure is expected to impact margins by 100-150 bps on-year in Q2 FY18. Higher commodity prices for steel, aluminium, crude oil would see margins of sectors like automobiles, tyres and chemicals drop by 150 to 250 bps.
Says Hetal Gandhi, Director, CRISIL Research, “EBIDTA margins could fall for 12 of the 21 key sectors. However, better revenue growth will ease pressures from the previous quarter when 16 key sectors had seen a dip in margins. Telecom services, pharma and IT services will see the sharpest fall in margins. In fact, had it not been for these sectors, the EBIDTA margins of key sectors of India Inc would have seen only a 50 bps drop.”
For fiscal 2018 overall, CRISIL Research sees an improving outlook for revenue growth. Rural demand should pick up, driven by favourable monsoon, farm loan waivers and higher MSP for crops. With no meaningful pick-up in private investments expected over the next few quarters, revenue growth of India Inc. will continue to remain muted for the year. Further, higher commodity prices and structural headwinds in sectors such as telecom and pharmaceuticals along with continued muted revenue growth would keep margin pressures alive for the year.