With commodity prices rebounding, operating profits are expected to decelerate a touch.
Corporate profits in the last year of the NDA regime may grow at 0%. That sounds bad but not so much when you consider that net profits fell both in 2014-15 and in 2017-18. What’s more, operating profits grew at sub 5% in two of the four years to 2017-18 and sub 10% in the other two.
Both manufacturing and exports have fared poorly these past few years and that’s why despite the push to GDP from the re-based data, the economy has been slowing from 8.2% in 2016-17 to 7.2% in 2017-18 and further to an expected 7% in 2018-19.
It could get worse before it gets better.
An assessment by Crisil says that while soft commodity prices enabled Ebitda margins for a clutch of 347 companies to stay stable at 15-17% in 2018-19, this could reverse. With prices now rebounding, operating profits are expected to decelerate a touch, crimping margins.
The problem is demand has flagged following the general slowdown in the economy, the disruption from demonetisation and GST which threw smaller companies off-kilter. Negligible investments by the private sector in the last four years have meant very limited job creation and in some instances job losses.
Insufficient liquidity, worsened by the NBFC crisis, is beginning to hit consumption demand and is starving even mid-sized firms of affordable working capital. And large government borrowings — including those done off the balance sheet — have crowded out the private sector. Real interest rates are at nears
Investors have lost money in the markets. The Sensex may be up but the rise masks a much broader weakness; 70% of the stocks with a market capitalisation of over Rs 1,000 crore have lost value in the last one year.
Economists now expect the economy to grow at sub-7% in 2019-20 — and only 6.2-6.3% in H1. The slowdown in global growth and trade will stymie exports, both merchandise and software. Had the government eased the FDI norms and thrown open more sectors, global corporations may have invested more. But FDI has been tapering off probably because of the government’s excessive oversight, especially on tax matters.
It’s not just auto, where already, two-wheeler makers are grappling with big inventories and are staring at production cuts and car sales are crawling. Poor regulation and intense competition has left telecom in tatters and highly indebted. Limited private sector greenfield investment has seen order books of most engineering companies dry up.
Insufficient supplies of coal and gas have left power plants running at low load factors. While rural distress and stagnant farm incomes are hurting sales of consumer staples and tractors, the moderation in urban demand too is hurting sales of consumer durables and retailers.
Home sales have moderated substantially in the last five years and the subdued construction and real estate activity — as buyers would have postponed purchases to take advantage of the new GST rates — will have a bearing on sales of a range of goods.
Most critically, India Inc’s credit profile isn’t improving; Crisil’s debt-weighted credit ratio rose to 0.89 in H2FY19, a dip from H1, primarily on account of downgrade of two large telcos. The ratio could worsen with several real estate companies strapped for cash. The short point is most companies don’t have the cash to make fresh investments especially since this time around banks will check the quality of the equity. And that means a revival in private sector capex is many years away.