India Inc’s December quarterly numbers were a fail again. With the effects of demonetisation and GST implementation a distant memory, the expectation was that India Inc would report smarter growth.

But that was not to be.

The ILFS crisis, the lag impact of higher crude prices in the second quarter were the dampeners. End result: despite topline improving smartly by 20 per cent for Nifty 50 companies, the bottomline increased by a mere 4 per cent (adjusting for one-time exceptional items)!

Five years of hope crushed. Many experts came with statistics that India Inc’s net profit-to-GDP ratio is at multi-year low and hence the reversal was just around the corner. At the beginning of each year, there is a build-up of hope that India Inc results would be better in the new year. Looking at the first nine-month data of the current year, that wait is getting longer. Now, the hope is on FY2020 numbers.

After the Lehman crisis, India Inc’s growth has been patchy. We did not see sustained growth in the net profit. From the year 2001 to 2008, India Inc’s net profit-to-GDP ratio improved steadily from 1.7 per cent in 2001 to the peak of 7.1 per cent in 2008. Since then, it has been falling consistently till 2016. In 2018, it stood at 3.1 per cent and the expectation was that it would improve to 3.3 per cent in FY2019. But the net profit growing less than the growth in the nominal GDP makes it highly unlikely that we would see net profit-to-GDP ratio of 3.3 per cent.

The stock market is slave to earnings. Till earnings improve, it is highly unlikely that we will see a major re-rating (don’t mistake a rally of few thousand points as a major re-rating) for the Indian stock market. For re-rating to happen, India Inc has to grow at double digits. The last time India Inc’s net profit grew at double digits was in 2014, when the profits had grown at 10.2 per cent. In 2004, Nifty 50 earnings grew by 41.6 per cent, followed by 29 per cent growth in 2005. Hence, a growth in double digits for a couple of years is not impossible. We need this kind of growth numbers in the net profit to see the next mega bull run. The current set of numbers does not make a case for a mega bull run.

Reliance Industries and Tata Motors-Two extremes

The December quarter would be remembered for two major events. First, Reliance Industries became the first company in India Inc to report quarterly net profit of Rs 10,000 crore. At the other extreme, Tata Motors reported highest ever loss of Rs 27,000 crore—highest by any Indian company. Of course, Tata Motors’ loss was more due to impairment of assets in JLR and hence it is not recurring in nature, but Reliance Industries’ net profit of Rs 10,000 crore could be more sustainable due to its strong petrochemicals and refining businesses.

There is stress on the rural side which is reflected in the sales of motorcycles and tractors. Rural market was one segment in which India Inc was hoping to report smarter growth. While players like HUL did report smarter volume growth in the rural market, there is a kind of uncertainty in terms of the sustainability of growth. The good news is that the chances of El Nino is virtually ruled out this year. The other measures of the government before the elections are going to put more money in the rural economy. That should help push the demand from the rural economy. But it is a little early to gauge how much this will transmit into the bottomline.

The capex cycle is not showing any green shoots, which makes the scenario worrisome. The RBI in its monetary policy unveiled on 7th Feb 2019 stated that the investment activity is not robust. “Investment activity is recovering, but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption,” the RBI stated. If the US and China fail to iron out their differences, the trade war would intensify and that could impact India Inc earnings.

The interest cost is one factor that is going to keep the margins under check. Post the ILFS crisis, the costs of borrowings have moved up. That’s impacting consumption. The RBI in its latest monetary policy reduced repo rate by 25 basis points, but the same has not been transmitted by the banks. In the December quarter, the interest cost of India Inc (excluding banks and NBFCs) moved up by 20 per cent. Vodafone Idea and Reliance Industries saw a major jump in their borrowing costs on a YoY basis. Due to the higher capex planned by both players, it is unlikely that we may see their borrowing costs moving down on a YoY basis.

In a nutshell, there are not many positives in the December results that investors can take home. If I have to search for companies based on quarterly results in this market, I would look at companies whose profits have improved, especially in the mid-cap and small-cap space, both on YoY and QoQ basis. Many mid-cap and small-cap companies have seen their share prices taking a beating due to the poor market sentiments, thereby making their valuations attractive. These companies could present good buying opportunity for the long term, provided the promoters have no pledged shares and these are zero-debt companies. If these are high dividend yield stocks, then it would be like a cherry on the cake.

Here’s waiting for double-digit growth. May a good monsoon this year get us there!

Highlights of December 2018 results

  • Nifty 50 companies’ sales improved by 20 per cent YoY and 4 per cent QoQ
  • Nifty 50 companies NP increased by 4-plus per cent, both Y0Y as well as QoQ
  • Among Nifty 50, Coal India, Vedanta, ONGC, HDFC Bank and TCS saw smart improvement in their operating profits
  • 23 companies in Nifty reported improvement in their PBDIT, both YoY as well as QoQ.
  • Vodafone Idea interest cost moved up substantially from Rs 1190 crore in December 2017 to Rs 2830 crore in December 2018. This was mainly due to the merger of Idea and Vodafone
  • Reliance Industries interest cost more than doubled as compared to last year for the same quarter, increasing from Rs 1094 crore to Rs 2405 crore.
  • India Inc (excluding banks and NBFCs) interest cost moved up by 20 per cent YoY. The saving grace is that it declined by 5 per cent QoQ
  • Reliance Infra saw maximum reduction in interest cost from Rs 759 crore to Rs 229 crore.
  • Out of 414 companies (from BSE 500), more companies saw their interest cost rising (220 companies), while 148 companies saw their borrowing cost declining.

 

Sunil Damania

@sunildamania

Disclaimer: This blog is only for education purpose. We don’t give buy or sell call on any company. All investors are advised to do their independent research and/or consult their financial advisor.