The Indian corporate sector has registered a broad-based revenue growth of 22% on a yoy basis during Q1FY18-19. ICRA’s 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 Q1FY18 because of GST-related inventory de-stocking. 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-base; and IT, which reported a healthy 12.9% yoy growth, supported by strong performance in their digital offerings and partial recovery in the BFSI segment.
Many companies also reported price hikes due to an increase in raw material prices. The sales growth was however flat at 0.7% when considered on a qoq basis.
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 Q1FY2019 has come on a low-base because sales in Q1FY2019 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 an 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 Q1FY2019 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 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.
According to ICRA, the corporate sector had expected that GST and E-Way bill would benefit the organized players in FY2018 by way of reduction in tax arbitrage for the unorganized segment. However, the Q1FY19 results show otherwise and some companies have indicated that the unorganized segment continues to have a reasonable market share and the transition from unorganized to the 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.
Amongst the sector that could not sustain their EBDITA margins were airlines and cement. While the airline industry was under pressure because of the rise in fuel prices, strengthening of the US Dollar, and lower yields & competitive pressures, the cement sector’s EBITDA margin was negatively impacted by the 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 Q1FY2019 on a yoy basis, which put significant pressure on sector’s EBITDA margin, close to 30% increase in the fuel cost per available seat kilometer in Q1FY19 was reported on a yoy basis. The same could not be passed on to the passengers and yields were down 5.5% in Q1FY2019 on a yoy 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 yoy basis while another indicated a 9.8% increase on a yoy basis. Despite the higher input costs, the realizations were flat on a yoy basis and up only Rs70-100 per tonne on a qoq basis.