By any yardstick, FY18 would have to be among the most difficult years for corporate India with the lagged effects of demonetisation continuing to impact business and the rollout of a complex indirect tax regime throwing firms into disarray. The good news is that companies have been able to adjust to the GST, as reflected in the better GDP growth in Q3FY18. To be sure, some key sectors—banking and exports, for instance—remain under pressure; until these two spaces are in better health, India Inc cannot recover fully. The other segments of the economy that need to be resuscitated are construction and real estate; only once this happens, can there be meaningful job creation. Meanwhile, India Inc seems to be getting back on its feet and is expected to turn in a good performance for Q4FY18, even if it is partly due to a favourable base effect. In aggregate, the top line growth could match that in Q3FY18 of around 15%, though the bottom line might not be as impressive. For the Sensex set of companies, earnings are estimated to rise by about 10% y-o-y. Going by the volume data, manufacturers of commercial vehicles, two wheelers and passenger vehicles should all report strong top line growth and better margins.
At HeroMoto, for instance, volumes in the three months to March were up 24% y-o-y, while at Ashok Leyland M&HCV, they increased 15 % y-o-y. With supply chains up and running post disruptions due to GST, the FMCG pack, too, should do well. The good news is that the production of a host of commodities—steel and cement—has risen smartly and the manufacturing in general is doing well. This should reflect in the order books of capital goods manufacturers; in Q3FY18, Larsen & Toubro’s order book was up a smart 38% y-o-y, and should the trend continue, it would mean the capex cycle is bottoming out. State-owned banks, however, will report poor numbers because loan growth has been very modest and provisions for loan losses, as also bond market losses, will be high. The bottom lines of telcos, other than RJio, too, will be bludgeoned due to the tariff war and regulatory changes. It is unlikely that real estate businesses will shine, though road builders should have a good story to tell. With exports under pressure, it’s important IT companies are able to command more pricing power and also grow volumes.
While the March quarter may not see them at their best, with revenues expected to grow just about 0.5%-2.2% sequentially, analysts believe the revenue guidance they provide for FY19 would be promising. The Q3FY18 earnings season revealed that raw material cost pressures were easing; that trend should persist in Q4FY18 since most commodity prices have been stable, or have fallen, though crude oil prices have risen. Some businesses, therefore, could see operating margins contracting, though by and large, margins should expand. Unfortunately, most of corporate India remains highly leveraged, as a study by CARE shows, and the interest cover ratio (ICR), for a sample of 2314 companies, did not really improve too much for the nine months to December 2017, compared to what it was in FY17. That would suggest cash flows are somewhat crimped. Hopefully, a good monsoon and a third consecutive bumper harvest will change that.