Going by the less than ordinary performance of companies, in the three months to June, a recovery in India Inc appears some time away. The disappointing results aren’t too surprising given high frequency data for recent months hasn’t really signalled any broad-based pick-up in economic activity.
Adjusted net profits for the BSE 30 set of stocks fell 1.4% year-on-year while they were flat for the Nifty50 basket, despite adventitious gains in the energy sector. For a larger universe of 2,642 companies (ex-banks and OMCs), net profits have fallen 2.7% y-o-y on a top line that’s barely grown. Worryingly, the sum of operating profits and employee expenses, a proxy for GVA, increased by just 2% in Q1FY16.
“We see limited scope for positive surprises in global and domestic ‘macro’ drivers but see scope for negative surprises in earnings,” Kotak Institutional Equities wrote.
Economists are betting on consumption to drive the economy in the second half of the year driven by spends in the festive season, a good sowing season which should boost farm incomes and more money in the pockets of government employees.
However, some economists are concerned the consumption spends expected to drive the economy, in the next few months, could be delayed. “Will expectations of GST implementation in 1H17 push back discretionary demand, despite the good monsoons and the 7th Pay Commission? We think there could be some postponement, especially if the prices of consumer durables, such as cars, are slated to slip by 2-5%,” Indranil Sengupta, economist, Bank of America Merrill Lynch, wrote recently.
Meanwhile, capital expenditure will probably stay muted even though capacity utilisation may have inched up and sanctions for projects by banks were up 9% in FY16.
The fact is the pipeline of projects remains fairly empty and the total value of projects sanctioned in FY16 fell 5% y-o-y to R1.4 lakh crore.
Data for July and August has been disappointing.
The sharp contraction in the IIP in July by 2.4% was unexpected and broad-based across sectors; this was the second contraction in four months. Capital goods contracted for the ninth consecutive month dragged down by weak private sector investment and a slow start to public capex.
Sonal Varma, economist at Nomura, observed in a recent note, industrial growth has been weak since end-2015 and remains below the 3.5-4% trend of last year. “Private investment is likely to remain lacklustre, but capital goods could receive a boost from the public sector where project awarding activity has picked up and should lead to higher capex by year-end,” Varma noted.
Slow growth and benign inflation have opened up the possibility of a 25 basis points rate cut at the October 4 policy, according to Samiran Chakraborty, economist at Citibank. Chakraborty pointed out the “upside risks” envisaged by the Reserve Bank of India (RBI) to its March, 2017 CPI target have substantially diminished now. “On the back of the soft economic activity data — Q1FY17 GDP at 7.1%, July IIP contraction of 2.4% y-o-y — and stabilisation of CPI within the target range, the RBI can bring forward another 25bps rate cut in the December policy as well, “ Chakraborty observed.
Clearly the core sector isn’t seeing much momentum. With construction activity dull, sales of cement have remained subdued in the five months to August at around 4.5% year-on-year; some markets have seen a price correction of 2-3%.
The sharp slowdown in sales of medium and heavy commercial vehicles (M&HCV) in July and August after some brisk activity between April and June, manufacturers say, has resulted from lower freight rates and less replacement demand. At Tata Motors sales fell 17% y-o-y while Ashok Leyland reported a 6% fall in sales after reporting a 15% rise in volumes in Q1FY17. Overall, in August, sales rose just 1.5% year-on-year.
Non-oil exports rose 1.8% y-o- after a drop of 4.5% in July, but this was more on the back of a favourable base effect; on a seasonally adjusted basis, non-oil exports fell 0.3% m-o-m. While in value, non-oil export did fairly well, volumes fell 3.6% y-o-y on the back of a 5.9% fall in July, indicating weak demand in overseas markets.
Given demand is weak both in the home market and overseas, private investment is likely to remain lacklustre. While government spends may be on track the target capex in itself is just 2% higher than in FY16. Nevertheless, there should be some uptick in the economy in the next few months year on the back of better rural demand and the boost to urban incomes from pay commission hikes and arrears. While the monsoon may be marginally deficient, sowing in an additional 5.3 million hectares should reap the country a bumper harvest.