Report Sees Corporate Revenue Growth Down at 12%-13% in Q3 on High-Base Effect; Cost Pressure
Corporate revenue growth is expected to print at 12%-13% on-year for the third quarter of this fiscal ended 31 December 2018, or 400-500 basis points (bps) lower than the about 17% on average in the first two quarters, predicts CRISIL. “That’s primarily because of the high-base effect created by the 13% growth seen in the third quarter of last fiscal, which followed around 7% in the preceding two quarters,” says the report.
Prasad Koparkar, senior director, CRISIL Research says, “Commodity and infrastructure-linked sectors are expected to support revenues for the quarter ended December. Steel, cement, natural gas and petrochemicals are expected to be driven by volume and/or realisation growth, while sectors such as construction and capital goods are expected to grow on a pickup in execution of key infrastructure-led government schemes. In consumption spending-led sectors such as airline services and retail, revenues will be supported by positive demand sentiment, while in export-oriented segments such as IT services and pharma, the boost would come from a weak rupee on a y-o-y basis.”
Growth in operating profit (EBITDA) or earnings before interest, tax, depreciation and amortisation, is also expected to print lower, at just below 10% year-on-year compared with about 15% over the three quarters preceding.
Linked to this, India Inc is expected to report a margin contraction of around 50bps year-on-year for the quarter amid rising raw material costs across sectors.
The forecast is based on CRISIL Research’s analysis of 362 companies, which account for ~67% of the market-capitalisation of the National Stock Exchange, excluding banking, financial services and insurance (BFSI) and oil sectors.
However, overall revenue growth will be constrained by a demand slowdown in automobiles, sugar, aluminium and telecom services, according to the report. Automobiles revenue is expected to have been impacted by a rise in ownership costs, while the other sectors would bear the impact of lower realisations and competitive pressures.
Even with healthy top-line growth, CRISIL expects to face dampened profitability at the operating level with rising input prices building pressure on the cost structure. Despite softening of commodity prices and a weakening of the rupee towards the end of Q3 FY18-19, the prices of most common commodities remain high on-year. Having said that, the full impact of the softening may be visible in the fourth quarter of this fiscal.
Says Rahul Prithiani, director, CRISIL Research, “Domestic prices of coal, long steel, flat steel and aluminium are expected to have risen 13%, 15%, 18% and 6%, respectively, on-year in the third quarter. Additionally, oil prices are expected to print 10-11% higher even as rupee depreciation would be ~11% on-year. Limited ability to pass through increased input prices to end customers in sectors such as airlines, cement, retail and telecom due to competitive pressures and high sensitivity to price movements will also accentuate pressure on the margins.”
In airline services, aggregate revenue of the sample is expected to increase 16%-18% on year-on-year in the third quarter of fiscal 2019 on the back of a strong growth in passenger traffic, primarily in the domestic sector. In cement, aggregate revenue across large-, mid- and small-sized players is expected to witness a growth of ~10%. In the fast moving consumer goods (FMCG) segment, CRISIL expects year-on-year aggregate revenue growth of 7%-9%.
In IT services sector, the rupee’s depreciation against the dollar so far this fiscal would likely boost the sector’s revenue, as per the report. In pharmaceuticals, a favourable domestic market and new product launches, coupled with the rupee’s depreciation are expected to support revenues for both large- and mid-sized formulation players, whereas in power, increased demand is expected to generate 6%-7% higher revenue. In steel products, revenue for the quarter is expected to witness robust 25%-30% growth, led by healthy volume growth and higher steel prices.