NEW DELHI: As India finalized its transition to Goods & Services Tax (GST) with effect from July 2017, the financial performance of Indian Corporate Sector during the first quarter of the current fiscal tripped, as many of the consumer-oriented sectors faced inventory de-stocking (by trade channel) and offered discounts to clear pre-GST inventories, according to ICRA Research Services.
In addition, recovery in raw material prices, especially metals and rubber also led to contraction in earnings across few sectors, while sector-specific dynamics (like increasing competitive pressure in Telecom) and regulatory hurdles (in Pharmaceuticals) played a spoil sport.
Revenue growth slowed down but earnings contraction was sharper as multiple factors hurt margins According to ICRA’s estimates, the growth in aggregate revenues of 448 companies slowed down to 5.3% during Q1 FY 2018 as compared to the preceding quarter (Q4 FY2017 – 8.3%) when performance of corporate India had started showings signs of recovery from the demonetisation move.
However, the impact of GST roll-out was higher on margins as reflected by almost 180bps contraction (on YoY basis) to 15.3%, which is among the lowest in past several quarters.
In ICRA’s view, lower primary sales (ahead of GST roll-out) and discounts offered by companies to clear pre-GST inventory, played a key role in depleting earnings, especially in sectors like Automobiles, Consumer Durables and FMCG.
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Apart from higher promotional activity, recovery in raw material costs also contributed to margin pressure, especially in the Automobile sector, which also had carry over impact of transition to BS-IV.
Cement and Steel companies performed relatively better on price hikes. Cement companies were relatively better during the quarter even as volume growth remained subdued.
The stable performance was driven by sharp increase in realizations, especially in the Northern and Eastern markets, which helped companies to offset the impact of recovery in power and fuel (higher pet coke prices) and freight costs (diesel and ban on overloading).
The performance of steel companies was a mixed bag during the quarter. For instance, while Tata Steel reported strong performance backed by spurt in volumes (ramp up in Kalinganagar plant) and better realizations, JSW Steel reported margin contraction owing to lower volumes (weak exports) and higher raw material costs.
Overall, the high indebtedness in the steel sector continues remain a credit concern. Automobile OEMs, Telecom, Pharmaceutical and FMCG contributed to lower revenue growth during Q1 FY2018.
Among the key sectors, the automobile sector witnessed deferment in sales as GST rates across many of the segments; especially in Passenger Vehicles (Mid Size plus vehicles) were expected to bring down vehicle prices. As a result, OEMs resorted to lower production in July and focused on clearing pre-GST stock by offering higher discounts.
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Comparatively, the two wheeler segment performed better (sales grew by 8%) because OEMs ramped up production of BS-IV variants (owing to low availability of vehicles with dealers) and healthy demand from wedding season in North India .
The Commercial Vehicle segment, however, reported a decline of 9% in sales primarily due to sharp contraction in M&HCV segment. This was because of deferment by fleet operators ahead of GST roll-out and adverse impact of pre-buying in the previous quarter.