A ray of hope

The April-June 2018 quarter results have been encouraging for corporate India as earnings have come back into the green after contracting in three out of four previous quarters. The combined net profit of all companies is up 7.9 per cent year-on-year (YoY) during the quarter against 7 per cent decline during the same quarter last fiscal year and 21.6 per cent decline in the fourth quarter of 2018. In many ways, corporate India seems to have finally recovered the ground it had lost after demonetisation and the roll-out of the goods and services tax. An analysis of over 2,200 companies shows that India Inc has reported a combined net profit of Rs 1.08 trillion, the highest in the last 12 quarters though still a tad lower than the high of the June 2015 quarter. The revenue growth rate of 18.7 per cent is the highest in three years, buoyed by higher commodity prices and the low base effect of the June 2017 quarter.

Most of the incremental growth in earnings has been contributed by commodity producers (energy and metal and mining companies), which has gained from higher prices in international markets. Moreover, an increase in import duties at home has also aided metal producers. Discretionary spending has recovered faster than consumer spending on personal products, food and tobacco. This is evident from the fact that the combined net sales of FMCG companies are up 10.7 cent YoY in the quarter, those of automobile makers (ex-Tata Motors) are up 24.5 per cent. Analysts attribute this dichotomy in consumer spending to the recent surge in retail lending, which is largely used to fund the purchases of big-ticket consumer goods. The combined net interest income of non-bank lenders is up 27 per cent YoY. The industry's income has grown by over 20 per cent YoY in eight out of the last 10 quarters. The other two star performers have been pharmaceuticals, supported by strong performance in the domestic markets, and information technology, which has reported healthy growth because of their digital offers.

The numbers are, however, ambiguous on the state of investment demand in the economy. The combined revenue of capital goods, construction and engineering firms is 12 per cent higher in the last quarter, the best in at least three years, but a large part of the growth has been contributed by the price increase in commodities, specifically graphite electrode makers, whose product prices have jumped five times in 2017 due to a clampdown in China. Capital goods makers in other industries too have been able to pass on the higher costs to customers, leading to top line growth but without adequate evidence of a big surge in production. Salary and wages for capital goods makers are up 4.4 per cent, in line with growth in the previous two years. Concerns about growth are largely exogenous — the global trade war, the US-Iran situation or an emerging market contagion caused by Turkey. The behaviour of the monsoon will also be critical to the rural economy’s well-being and the prospects of consumer goods companies. But the overall numbers reflect the theme of a recovering economy. Other things remaining equal, Indian companies should see improvement in earnings, backed by consumer demand for goods and availability of credit. Robust demand will mean that capacity utilisation levels will improve and could well lead to a turn in the capital expenditure cycle.