The cumulative revenue growth of 642 companies in the Indian corporate sector skid to an 11-quarter low at 5.7% in Q1FY20 mainly due to weak consumer sentiments and subdued government spending on Infrastructure. As per ICRA Ratings, the financial results of its sample companies were reflected in sequential contraction of 7.7% in revenues from consumer-oriented sectors. Additionally, demand from the infrastructure segment was down, with government spending on infrastructure projects reducing in the run-up to the general elections in Q4FY19 and Q1FY20. This was reflected in the sharp slowdown in growth in GFCF during the two quarters to 3.6% and 4%, and the slowdown in cement production volume growth. The EBITDA margin however, reflect an optical improvement of 136 bps on a yoy basis and remained flat sequentially at 17.7% in Q1FY20. This was largely on account of the transition to Ind AS 116, whereby operating leases have been capitalized by companies, thereby reducing rental costs and increasing depreciation and interest outgo. PBT margins, on the other hand, contracted on a yoy basis by 114 bps to 7.8% and improved sequentially.
Shamsher Dewan, Vice President & Sector Head - Corporate Sector Ratings, ICRA said, “The weakness in the consumer-linked sectors has been visible in multiple sectors. Automobiles sales reported sharp double-digit decline, which has continued into the current quarter as well, while FMCG companies reported a sequential slowdown in volume growth in both rural and urban markets. However, bucking the trend, companies in the Consumer Durables sector reported growth during the quarter on the back of sales of cooling products due to the extended and harsh summer.”
“The contraction in PBT margins was due to the subdued volumes, negative operating leverage, high discounting and tepid realization in select commodity sectors, especially metals,” 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 3.5x from 4.1x in Q1FY19 and 3.7x in Q4 FY19. This was driven by sharp yoy increase of 22% in interest costs on account of a) higher interest rates, b) increase in debt levels and c) Ind AS 116 adjustments, on account of which lease rentals have been bifurcated into interest and depreciation costs. Sectors like oil & gas, telecom and construction saw significant increase in interest costs on a yoy basis.
In terms of sector specific trends, consumer-linked sectors like automobiles and FMCG reported weakening. Within the automobile sector, the Passenger Vehicle segment registered a decline of 18% in domestic sales in Q1FY20 on a yoy basis because of high base and weak customer sentiments, partly contributed by rising ownership costs (Fuel, EMIs and Insurance). The two-wheeler wholesale dispatches declined 12% during the quarter because of weak consumer sentiments, increased cost of ownership and rural slowdown. Although FMCG companies reported volume growth, there was a sequential slowdown in volume growth in both rural and urban markets.
Among other sectors, the IT sector reported strong revenue growth of 10.0% in Q1FY20 (in INR terms) supported by rupee depreciation on a yoy basis and traction in digital offerings across verticals.
Cement volume growth slowed to 1.8% due to slowdown in project execution on account of general elections, economic slowdown impacting private sector capex, as well as liquidity issues and labour scarcity. Steel consumption on the other hand, grew by 7% during the quarter on a yoy basis.