The financial results released by 642 companies in the Indian corporate sector shows revenue growth in Q4FY18-19 hit a six-quarter low at 10%. The key reason for the decline in revenue growth was weak consumer sentiments and softening of commodity prices. The revenue growth in consumer-linked sectors in ICRA’s sample was only 3.8% in Q4FY19 on a yoy basis, down from 27.9% in Q3FY19. Comparatively, the revenue growth in commodity linked sectors was at 12.4% in Q4FY19 on a yoy basis, down from 51.4% in Q3FY19.
Shamsher Dewan, Vice President - Corporate Sector Ratings, ICRA said, “The weakness in the consumer-linked sectors was visible across most consumer-oriented sectors such as passenger vehicles, two-wheelers, consumer durables and FMCG since H2 FY19. The decline in consumer sentiments was visible in both urban and rural segments”. The commentary on rural growth from Auto OEMs and FMCG companies indicate a slowdown in growth which can be attributed to a muted rabi harvest.
The EBITDA margin of ICRA’s sample declined by 44 bps on a yoy basis and 23 bps on a qoq basis to 16.6%. However, several sectors such as airlines, cement, consumer food and consumer durables reported a sequential improvement in margins because of price hikes initiated by companies in select sectors, lower cost of imports (benefits of improvement in INR vis-a-vis US$ in Q4 compared to Q3) and softening in commodity prices.
“Although commodity prices were higher on a yoy basis for both FY19 and Q4FY19, there was a softening in prices of key commodities such as oil, steel and aluminium on a sequential basis which supported an improvement in the EBITDA margins on a qoq basis,” reported Dewan.
The interest coverage ratio of ICRA’s sample, adjusted for sectors with low debt levels (IT, FMCG and Pharmaceuticals) witnessed a decline to 3.8x from 4.1x in Q4FY18. This was because the growth in absolute EBITDA (7.2% on a yoy basis) was significantly lower than the increase in interest costs (14.6% on a yoy basis). The sharp increase in interest cost was because of higher interest rates and an increase in debt levels, including working capital.
ICRA expects the demand in the automobile sector to remain subdued owing to weak consumer sentiments owing to rising ownership cost, subdued rural demand and tight financing environment have given the liquidity constraints in the financial markets. The growth in the sector will start stabilising most likely from H2FY20 because of pre-buying related to the impending implementation of BS-6 norms from April 1, 2020, especially in the CV segment.
Despite the expectation of a slowdown in Automobile sales, the auto component industry is expected to grow between 10-11% in FY20 supported by increasing content per vehicle owing to transition to BS-VI and safety norms. Mandatory introduction of ABS and BS-IV norms will result in almost 15% in two-wheeler prices and will also push prices of diesel PVs by 8-10%
ICRA expects cement demand growth of around 8% in FY20. This growth is likely to be driven by housing, primarily rural housing and affordable housing, and improved focus on infrastructure segments, main road, railway and irrigation projects. The incremental cement demand of around 24-28 million MT is likely to be greater than the incremental supply of 17-18 million MT in FY19-FY20. This is likely to result in improvement in the capacity utilisation to 69% in FY19 and 71% in FY20 from 65% in FY18.
The domestic steel demand growth is likely to moderate to 7% in FY20 from 7.5% in FY19 because of weakness in demand for flat products. Steel price has moderated from H1FY19 highs and near-term price hike is likely to be low given the subdued demand environment. Moderation in steel prices and elevated coking coal prices is likely to put pressure on profitability indicators in FY20.
ICRA expects nearly two-thirds of capacity addition in the power sector to be driven by Renewables over the next two years. Utilisation levels of Thermal Plants are expected to increase to 62-63% aided by 5-6% energy demand and limited net capacity addition. DISCOM losses are expected to reduce gradually but overall progress on tariff hikes and AT&C losses remains below expectation
Despite the reduction in debt levels and planned de-leveraging plans along with some improvement in operating profits, the coverage indicators would continue to remain weak for Telecom companies over the near-term.
ICRA’s ‘Negative’ outlook for Residential Real Estate sector continues to reflect liquidity crunch on the back of slow sales and reduced availability of credit. However, ICRA’s analysis suggests that large players have continued to gain market share. For instance, the top ten listed entities registered a 44% yoy growth in the area sold during FY19; record sales achieved in both Q3 and Q4 FY19.