The topline performance of the bulk of India Inc has been impressive, with a growth of 17 per cent year-on-year in the March quarter — the best in eight quarters — for Nifty 50 companies excluding banks, oil and gas and metals, largely led by Reliance Industries, Grasim Industries and M&M.

Weak sales growth

On the other hand, sales growth of companies that are part of the Nifty 500 companies (excluding banks, oil and gas and metals) stood at about 9 per cent, dragged down by sectors such as telecom, information technology and pharmaceuticals.

“Sales growth has been extremely weak for small-cap companies since several quarters, even as large-cap sales growth has accelerated sharply. Aggregate sales have grown about 14 per cent y-o-y on an average over the last five quarters for large-cap companies, compared with about 5 per cent y-o-y growth for small-caps,” said IIFL in a note.

Profit growth, which was recovering y-o-y in the previous five quarters, slowed down in Q4, thanks to higher input and overhead costs. Telecom, select automobile companies,

Operating profit

IT and pharmaceutical firms led the recovery. “Competitive and pricing pressures continued in telecom and pharma sectors, while the growth outlook for IT remains muted,” said ICICI Securities.

Operating profit for Nifty companies grew 9.5 per cent y-o-y, compared to an average 14 per cent y-o-y growth in the previous two quarters. Smaller companies have suffered more, with operating profit of Nifty 500 companies declining 1 per cent y-o-y, compared to an average 12 per cent y-o-y growth in the previous two quarters.

Reported net profit declined more in the case of Nifty 500 (7 per cent) than Nifty 50 companies (2 per cent) despite a favourable base, thanks to a jump in interest cost — 42 per cent and 14 per cent for Nifty 50 and Nifty 500, respectively. Net profit on an adjusted basis rose 4 per cent for Nifty 50 and declined 16 per cent for Nifty 500.

While the robust and improving trend in topline growth gives relief on the demand front and will support higher topline growth, pressure on profitability could be a big drag.

“EBITDA margin for most sectors, except consumer companies, have either remained flat or declined (median EBITDA margin of top 250 companies has declined 80 bps q-o-q and 40 bps y-o-y) indicating that operating margin expansion may not be the lever for earnings growth, going ahead. Also, a depreciating rupee could impact input costs of imports while rising interest rates will incrementally impact cost of borrowing for companies,” pointed out ICICI Securities.

Favourable factors

However, one can still hope better earnings recovery due to factors such as rural demand outgrowing urban demand, cyclical recovery in commodity prices, improving demand for rural housing and transportation infrastructure and retail credit demand on one hand, and improving asset allocation, slow pace of capacity additions and cautious capital allocation by corporates on the other.

IIFL is confident of an earnings recovery in FY19 due to improving economic growth, turnaround in profits of PSU banks and low base of healthcare sector. Large- and mid-cap companies will drive the earnings recovery while small-cap companies will continue to suffer, according to analysts.

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