Corporate Results for 2017-18 Indicate Sectoral Differences

V K Vijayakumar

India’s GDP growth rate has improved smartly to 7.7 per cent in Q4 enabling the annual growth rate for 2017-18 to touch 6.7 per cent. The GDP growth projection for 2018-19 is pegged at 7.4 per cent, which would be, by far, the best among the large economies in the world. In sync with the improving growth rate, corporate results also have been improving, albeit slowly. An early analysis of Q4 data of 1372 companies excluding banks, financial services and oil and gas firms showed a net YoY profit growth of 13.88 per cent (2.7 per cent growth in Q4 FY 17). Operating profit margin at 21.8 per cent showed a slow but steady uptrend. There is huge divergence in performance across sectors; but the net profit growth is at an 8-quarter high, and more importantly, there are clear signals of the earnings recovery gathering momentum, going forward.

An analysis of Q4 data of 1372 companies showed a net YoY profit growth of 13.88 per cent, says V K Vijayakumar

The important takeaways from the trends in GDP growth and corporate earnings growth are:

■ The economy, recovering from the adverse impact of the twin shocks of demonetisation and GST implementation, is on a steady uptrend. India will re-emerge as the fastest growing large economy in the world this year with a growth rate of around 7.4 per cent. This augurs well for the markets.

■ However, the spike in crude and possible rate hikes by RBI (one more rate hike of 25 bp likely in FY 19) can be headwinds to growth. Renewed fears of a trade war triggered by President Trump’s recent actions against China, EU, Mexico and Canada can be another headwind for global economy and markets.

■ Corporate earnings indicate major sectoral divergences. Retail-focused private sector banks, automobiles, IT, Oil Marketing Companies (OMCs), metals, cement, FMCG and consumer durables did very well with results, in most cases, in line with or exceeding expectations. Corporate-focused private sector banks, PSU banks, pharma and telecom performed poorly.

■ The robust performance of tractors, FMCG, two-wheelers and microfinance indicates strong rural recovery belying fears of rural crisis.

■ Divergence in the performances of large and medium/small companies. Large companies with excess capacity and pricing power are doing very well vis-à-vis medium/small companies without pricing power. Low margins and rising input costs are impacting the performance of medium/small companies.

■ An important feature of the market presently is the big dichotomy in valuations. Stocks of companies with good earnings visibility are richly valued and those where earnings growth will be a challenge are poorly valued. This can provide investment opportunities when the tide turns, as has happened in the case of IT and pharma stocks.

With growth in acceleration mode, credit demand will pick up. PSU banks are not in a position to meet this increase in credit demand. This will benefit the large private sector players. There are opportunities arising in select pharma stocks. Auto is firing on all cylinders and will sustain impressive earnings growth.

Markets are likely to turn very volatile, going forward. Since markets are richly valued, any external or internal trigger can cause corrections. Rising US 10-year yield might trigger capital flows from Emerging Markets like India. Recent electoral setbacks to the ruling party are a negative from the market perspective. Investors should expect only modest returns in 2018. Systematic investment during these volatile times will fetch handsome returns beyond 2018.