MUMBAI: India Inc reported a revival in year-on-year sales growth in the June quarter albeit amid pressure on profits and profitability. The trend is expected to continue since the next two quarters will reflect gradual stability in business after the implementation of the goods and services tax (GST) on July 1 and expected higher demand due to the festival season and a good monsoon.
However, firm input costs including those of raw materials and staff as a percentage of sales, along with a rising interest burden relative to operating profit may affect profitability.
A sample of 1,024 companies excluding those in the banking, finance, and oil and gas sectors reported the highest sales growth in five quarters of 5.6% year-on-year. However, operating profit growth slowed to 3.5% after staying above 6% in the previous five quarters. Growth in net profit at 10.6% was the slowest in four quarters. After including oil and gas sector companies, the sample size increased to 1,043 and sales growth improved to 9.7% while net profit growth was just 1.7% in the June quarter.
While top line growth shows a gradual recovery, input costs seem to be inching up. This is unlike a few quarters ago when companies were able to implement cost efficiencies, thereby protecting margins while sales growth was under pressure.
For the sample excluding oil and gas companies, raw material costs as a percentage of sales inched up to 31% in the June quarter from 30.6% in the year-ago period. After falling to 30% in the December 2015 quarter, the ratio has remained at around 31%.
The staff cost relative to sales was 14.7% in the June quarter compared with 14.9% a year ago. It has increased significantly from 11.8% three years ago.
Good Monsoon may Spur Spending
Another cost component that has recorded an increase over the years is interest relative to operating profit (EBIT). The ratio was at 26.5%, the highest since the June 2014 quarter, when it was 22.1%.
On the sector front, companies from the automobile, capital gods, cement, construction, consumer goods and textile sectors reported growth in net profit at the aggregate level. On the other hand, pharma, power, realty, retail, steel, telecom sectors reported a decline in profit.
The satisfactory monsoon in several parts of the country and higher sowing activity should support rural spending in the quarters to come.
The festive season in the September and the December quarter will add more momentum to consumption demand. Industrial demand may, however, remain tepid considering there aren’t any major signs of capital expenditure and efforts by debt-laden companies to seek financial restructuring.