Credit growth down from 14.2% y-o-y in Q4FY19 to 10.3% by mid-Sept; banks were risk averse, consumers cautious.
A combination of low consumer confidence, weak credit flows and anaemic demand is expected to have hurt corporate profits for the three months to September. The profit before tax (PBT) for the BSE-30 companies is estimated to fall by 1.4% y-o-y and that for the Nifty 50 by a sharper 4.4% y-o-y.
For its universe of companies too, Kotak Institutional Equities (KIE) expects PBT to fall by 4.6% y-o-y. Sectors such as automobiles, metals, oil & gas and telecom are expected to turn in a poor show. The larger private sector banks are tipped to do well, as are pharmaceutical companies. However, as analysts at Nomura pointed out, corporate slippages and related provisioning will remain high for several banks with the ‘watch list’ likely to increase for exposures to NBFCs or HFCs. Most IT companies are expected to report a y-o-y fall in Ebit margins due to higher costs in the US, investments in the digital business and transition costs in large deals. Consumer staples firms are expected to report subdued volume and revenue growth, primarily due to weak rural demand and tight liquidity conditions.
Indeed, consumer demand has remained weak since April, as evidenced by the continuous production cuts and frequent production holidays undertaken by automobile manufacturers; Maruti Suzuki cut production in every month since February. Consumer confidence dipped to a six-year low in September as sentiment around employment, income and discretionary spending declined, data from the Reserve Bank of India showed.
In particular, sentiment for discretionary spending weakened in the September round of the survey, the central bank said. The survey also revealed that sentiment for the overall economy and employment also declined and people were less optimistic about their income over the year ahead.
Bank credit growth slowed from an average of 14.2% y-o-y during Q4FY19 to 10.3% y-o-y by mid-September 2019, with banks remaining risk averse and consumers cautious. Axis Bank points out that between April and September, non-food credit contracted by Rs 1.3 lakh crore compared to an expansion of Rs 1.85 lakh crore in the corresponding period of 2018-19. However, corporate bond issuances were up by about Rs 70,000 crore y-o-y between April and August and foreign borrowings by companies too were higher.
In the June quarter, net profits for a sample of 2,179 companies (excluding banks and financials) fell 12% y-o-y; excluding Reliance Industries and TCS, they were down 15% y-o-y. The economy grew at just 5% y-o-y in the three months to June, the slowest in 25 quarters. Economic activity is, however, expected to see an improvement in the second half of the year, helped by festive demand in general and also an uptick in rural spends from a reasonably good harvest.