India Inc has witnessed a decent broad-based revenue growth of 22% on a Y-o-Y basis during Q1 FY2018-19, according to a study done by ICRA.
A sample of 173 companies indicated that sales growth was stronger in consumer-oriented sectors (auto OEMs, FMCG, consumer durables and airlines) and commodity-linked sectors (cement, iron & steel and oil & gas).
This was supported by low-base across most sectors in Q1 FY 2018 because of GST-related inventory de-stocking.
Of Pharmaceuticals and IT
The two sectors which have witnessed decent growth are – pharmaceuticals which grew by 20.8%, supported by strong performance in the domestic markets because of low-rate.
IT which reported a healthy growth of 12.9% on a Y-o-Y basis, supported by strong performance in their digital offerings and partial recovery in the BFSI segment.
Many companies also reported price hikes due to increase in raw material prices. The sales growth was however flat at 0.7% when considered on a Q-o-Q basis.
Commenting on the numbers, Shamsher Dewan, Vice President – Corporate Sector Ratings, ICRA said “The strong revenue growth has ensured that companies were able to protect their EBITDA margins (overall flat) to a larger extent on both Y-o-Y and Q-o-Q basis, reflecting that they have managed to offset the increase in raw material & fuel price through price hikes, operating leverage and cost reduction. While EBDITA margins of FMCG, iron & steel, capital goods, and auto OEM players increased, that of airlines and cement witnessed a decline because of sector specific dynamics.”
Interest costs, however, have been rising reflecting in the increase in interest cover ratio.
“The aggregate interest coverage ratio of the sample companies was at 5.7x, which indicates a marginal deterioration in the interest coverage indicators on both Y-o-Y (6.0x in Q1 FY 2018) and Q-o-Q basis (6.1x in Q4 FY 2018). This was primarily because the aggregate interest costs increased more than the aggregate EBIDTA,” said Dewan.
In terms of sector specific trends, consumer-oriented sectors like FMCG, consumer durables and automobiles continued to grow their domestic volumes and thereby sales.
However, the volume growth in Q1 FY 2019 has come on a low-base because sales in Q1 FY 2019 were impacted by GST related inventory de-stocking.
Besides volume expansion, the increase in sales was also supported by price hikes across multiple segments because of increase in raw material costs.
The sustained volume growth despite price hikes indicates continued growth momentum in the domestic market.
Sectors such as automobiles, consumer goods, paints and FMCG took price hikes in Q1 FY 2019 to counter the rise in raw material costs. In the automobile sector companies took price hikes to offset the rise in steel prices.
Several consumer-oriented companies have reported strong growth in the rural areas. The rural growth momentum is expected to continue, supported by expectations of normal monsoons, hike in MSPs and overall thrust on agri-economy ahead of elections.
GST and E-way Bill impact
According to ICRA, corporate sector had expected that GST and E-Way bill would benefit the organised players in FY2018, by way of reduction in tax arbitrage for the unorganized segment.
However, the Q1 FY 2019 results shows otherwise and some companies have indicated that the unorganized segment continues to have a reasonable market share and the transition from unorganized to organized segment is yet to fully materialize.
While a few others have mentioned that GST rate cuts in segments like paints and footwear will benefit the organized players going forward because it will reduce the tax arbitrage for the unorganized segments.
EBIDTA margins in Airlines and Cement
Amongst the sector that could not sustain their EBDITA margins were airlines and cement.
While the airline industry was under pressure because of rise in fuel prices, strengthening of the US Dollar and lower yields & competitive pressures, the cement sector’s EBITDA margin was negatively impacted by rise in pet coke prices and increase in freight rates and flat realizations.
Regarding the airline industry, global crude oil prices increased 47.6% in Q1 FY 2019 on a Y-o-Y basis which put significant pressure on sector’s EBITDA margin, close to 30% increase in the fuel cost per available seat kilometre in Q1 FY 2019 was reported on a Y-o-Y basis.
The same could not be passed on to the passengers and yields were down 5.5% in Q1 FY 2019 on a Y-o-Y basis.
As for cement, increase in pet coke prices adversely impacted EBITDA margins of players, one large company reported a 15.6% increase in its power & fuel costs on a Y-o-Y basis while another indicated a 9.8% increase on a Y-o-Y basis.
Despite the higher input costs, the realizations were flat on a Y-o-Y basis and up only Rs. 70-100 per ton on a Q-o-Q basis.
“In Q1 FY 2019, several companies in sectors such as airlines, auto OEMs, capital goods, consumer durables and tyres reported a sequential decline in their EBITDA margins. The key reason for the sequential decline in margins was increase in raw material prices like steel and rise in global crude oil prices,” said Dewan.
