Most companies have announced their March 2019 results and the picture is not encouraging. The stress of the economy growing at a mere 5.8 percent, a five-year low, is reflected in the quarterly numbers of corporate India.
Data shows that revenues of companies actively tracked by analysts have increased by around 10.5 percent while their operating profit has increased at half the rate at 5.80 percent, but the leverage on the books of the companies resulted in a profit decline of nearly 12 percent. Corporate India was thus squeezed from both ends.
The slowdown in consumption directly shows up in the revenue growth of the companies. Top line growth has slowed across the board. In some cases, the impact has been more severe than the others. Take for example the automobile sector, which has been impacted on account of various reasons like high fuel prices, higher insurance costs, rural stress and liquidity squeeze in the economy.
Slower off-take resulted in piling up of inventory which in turn prompted producers to cut down production and in some cases temporarily shut down operations.
A domino effect of a slowdown in the automobile sector could be seen in the auto-ancillary, steel and tyre producers as well as among auto-finance companies, banks and NBFCs.
The other key feature of the quarterly numbers was shrinking margins, which led to lower net profit. High input cost and increased competition have prevented companies from passing on the higher cost to customers. Rising debt levels and a liquidity crisis is putting pressure on companies.
But this stress is not reflected in the markets, with stock indices touching new highs, even though only a handful of stocks have pulled the market higher.
Nifty is trading at a historic price to earnings PE multiple of 24.5, very close to the upper band. This valuation itself reflects little headroom for the market to move higher.
Given these data points, there is little justification for the market to stay at the current levels unless corporate earnings shoot up.
Interest rate reduction definitely can help. But will any rate cuts by the central bank be transmitted to the broader market at a time when deposits are falling and banks are increasing rates to attract more deposits? Pumping in liquidity will help cool nerves and increase lending in the economy.
What can really help the economy is increased consumption. Demand in both rural and urban India has been hit. While the government to some extent has attempted to prop rural demand by transferring Rs 6,000 to every farmer in the country, it is still early days to gauge its benefits.
Urban India is waiting for tax sops from the government as well as measures to boost the economy, which can improve employment. Given the fiscal scenario and overall slowdown, the government has little room to spend. Sluggish global growth too is not supporting a rise in exports.
There is, however, a ray of hope in the housing sector. ‘Housing for All’ by 2022 is already resulting in a push in the construction sector. This is visible in sales of cement with almost all cement mills improving their capacity utilization and realizations across the country. Housing finance companies too are showing better numbers on account of affordable housing sales.
In terms of automobile sales, a good monsoon and the government’s proposal of banning vehicle produced before 2000 can help revive the sector to some extent.
As for infrastructure, continuity of existing projects should help revive the sector. L&T’s management in their post March quarter results said that the momentum on infrastructure building, coupled with the government’s focus on investments in areas such as airports, railroads, water supply & distribution, expressways, power availability, Oil & Gas production and mass rapid transit systems is expected to continue.
The government may need out-of-the-box thinking to revive growth, which is imperative to help corporate India earn enough to justify such high valuations. We will know soon enough what the government is planning when it presents the Union Budget.