E
CO
S
COPE
Higher costs offset better sales for India’s listed corporate sector in 1QFY18
RBI data confirm sharp slowdown in manufacturing GVA growth
n
13 October 2017
The Economy Observer
Reserve Bank of India (RBI) data for private corporate sector (2,744 listed non-government non-finance companies)
indicate that aggregate sales and expenses grew at 18-quarter high of 7.6% and 11% YoY, respectively in 1QFY18. At
3.4pp, the gap between expenses growth and sales growth was the highest in five years.
n
Interest payments declined 1.5% YoY for the second consecutive quarter. Interest coverage ratio was 1x or lower for
four industries – textiles, construction, iron & steel and telecommunication.
Owing to the sharper rise in raw material expenses vis-à-vis sales, operating profits contracted by 10% YoY, marking the
first decline in four years. EBITDA margin dropped to a 9-quarter low of 17.2%.
Finally, manufacturing GVA growth – as per the RBI sample – declined by a sharp 9.6% YoY in 1QFY18, because of a
sharp decline in the manufacturing sector’s net profit. This confirms the slowdown in GDP growth in 1QFY18.
n
n
Corporate sales in 1QFY18 grew fastest in 18 quarters…
Sales of the private
corporate sector increased
by 7.6% YoY, the fastest
pace in 18 quarters
As per RBI data, sales of the private corporate sector (comprising financial results of
2,744 listed non-government non-finance companies) increased by 7.6% YoY, the
fastest pace in 18 quarters
(Exhibit 1).
The pick-up in growth was driven by a
turnaround in sales growth of the non-IT services sector, which had contracted in
each of the last four quarters. The construction and electricity & gas supply sectors
also witnessed an improvement in sales growth
(Exhibit 2).
Although growth in sales
of the manufacturing sector decelerated slightly to 8.9% in 1QFY18 from 10.2% in
4QFY17, it continued to be healthy. ‘Petroleum products’, ‘iron & steel’, precious &
non-ferrous metals’, ‘fabricated metals’, ‘wholesale & retail trade’, ‘mining &
quarrying’ posted healthy growth in sales, aided by a favorable base.
Exhibit 2:
Industry-wise sales growth (% YoY)
8
Manufacturing
Food pdts & beverages
Textiles
Petroleum Products
Fertilizers & Pesticides
Iron and Steel
Construction
Services (other than IT)
Wholesale & retail trade
Telecommunication
IT services
Share in 1QFY17 4QFY17 1QFY18
sales (%)
Sales (% YoY)
68.9
(1.0)
10.2
8.9
5.5
0.1
(3.9)
5.6
4.2
(1.7)
6.9
7.3
8.2
(18.2)
33.5
19.4
1.2
(16.9)
(16.2)
7.2
7.9
(3.4)
26.0
20.6
5.3
2.8
(0.4)
6.4
11.2
(0.3)
(2.9)
4.1
2.9
(19.9)
0.7
24.4
3.3
7.7
(11.4)
(13.2)
9.2
11.2
4.8
2.9
Sales
Expenses
(pp)
Exhibit 1:
Expenses grew faster than sales in 1QFY18
16
Difference (RHS)
8
4
0
(% YoY)
(8)
1QFY13
1QFY14
1QFY15
1QFY16
1QFY17
0
(4)
1QFY18
To compute the growth rates in any quarter, a common set of
companies for the current and previous period is considered
Source: Reserve Bank of India (RBI), MOSL
The growth in sales in 1QFY18 was led entirely by larger companies. Companies with
annual sales of INR10b and above posted growth of 9.2% in the quarter
(Exhibit 3),
while the smaller companies (with sales less than INR10b) witnessed a 3.1% decline.
Based on paid-up capital (PUC), bigger companies (with PUC of INR250m and above)
– which account for four-fifth of total sales – grew faster, by 7.8%
(Exhibit 4),
as
against 6.7% growth in companies with PUC of less than INR250m.
Nikhil Gupta – Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Rahul Agrawal
– Research analyst
(Rahul.Agrawal@motilaloswal.com); +91 22 3982 5445
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Exhibit 3:
Sales growth by size of sales
Sales size class
(Mn Annualised)
Less than 250
250 to 500
500 to 1000
1000 to 5000
5000 to 10000
10000 and above
All Companies
Share in 1QFY17 4QFY17 1QFY18
sales (%)
Sales (% YoY)
0.2
(48.5)
(51.6)
(43.7)
0.3
(39.4)
(53.6)
(15.5)
0.6
(15.4)
(18.3)
(10.7)
5.5
(2.3)
(2.1)
(3.3)
5.1
1.9
(4.5)
2.7
88.3
0.8
9.5
9.2
100.0
0.1
7.2
7.6
Exhibit 4:
Sales growth by size of paid-up capital
Paid-up Capital
(PUC) class (Mn)
Less than 50
50 to 100
100 to 150
150 to 250
250 and above
All Companies
Share in 1QFY17 4QFY17 1QFY18
PUC (%)
Sales (% YoY)
1.2
2.8
3.7
5.5
86.8
100.0
2.6
1.5
5.8
1.7
(0.5)
0.1
1.0
5.7
4.9
6.0
7.7
7.2
7.9
6.6
6.7
7.1
7.8
7.6
Source: Reserve Bank of India (RBI), MOSL
…but raw material costs grew even faster
Total expenses outpaced the growth in sales, rising by 11% YoY in 1QFY18 – the
fastest in 19 quarters
(Exhibit 1).
Within expenses, raw materials costs (accounting
for ~45% of total expenses) grew 13.1%, while power & fuel expenses rose by 16.5%
after declining in seven of the last eight quarters. The raw materials-to-sales ratio
rose to 39.2% in 1QFY18 from 37.6% in the year ago quarter. Staff costs (11-13% of
total expenses), on the other hand, grew at the slowest pace (of 6% YoY) at least in
five years (barring 4QFY16)
(Exhibit 5).
However, as a proportion of sales, staff costs
continued to remain elevated
(Exhibit 6).
Owing to the sharper rise in raw material expenses vis-à-vis sales, operating profit
declined by 10% YoY in 1QFY18; this was the first instance of a contraction in four
years. EBITDA margin dropped to a two-year low of 17.2% in the quarter
(Exhibit 7).
Interest cost declined by 1.5% YoY in 1QFY18 after falling by 1.6% in the preceding
quarter. The interest coverage ratio deteriorated to 3x from 3.4x/3.2x in
4QFY17/1QFY17, close to the worst levels in the past five years
(Exhibit 8).
The
interest coverage ratio was 1x or lower for four industries – textiles, construction,
iron & steel and telecommunication.
Net profit tanked by 21.2% YoY in 1QFY18, marking the steepest decline in the last
10 quarters. Most of the sectors posted a decline in profits. Net profit margin
contracted to 5.5% from 7.5% in 1QFY17.
Exhibit 5:
At just 6% YoY, growth in staff costs remains
muted in 1QFY18...
20
15
10
5
0
1QFY13
(% YoY)
Staff costs
Owing to the sharper rise in
raw material expenses vis-
à-vis sales, operating profit
declined by 10% YoY in
1QFY18; this was the first
instance of a contraction in
four years. EBITDA margin
dropped to a two-year low
of 17.2%
Exhibit 6:
…however, staff costs as % of sales remain
elevated
52
48
44
40
36
1QFY13
1QFY14
1QFY15
1QFY16
1QFY17
Raw materials as % of sales
Staff costs as % of sales (RHS)
12
11
10
9
8
7
(%)
1QFY14
1QFY15
1QFY16
1QFY17
1QFY18
6
1QFY18
Source: RBI, MOSL
13 October 2017
2

Exhibit 7:
EBITDA margin dropped to two-year low in 1QFY18
21
20
19
18
17
16
15
14
1QFY13
1QFY14
1QFY15
1QFY16
1QFY17
1QFY18
(%)
EBITDA Margin
Exhibit 8:
Interest coverage deteriorated in 1QFY18
4.0
3.5
3.0
2.5
2.0
(x)
1QFY13
1QFY14
1QFY15
1QFY16
1QFY17
1QFY18
Interest coverage
EBIT/Interest Payment
Source: RBI, MOSL
RBI data confirm the sharp slowdown in manufacturing GVA growth
The Central Statistics Office (CSO) had released the 1QFY18 GDP data in August
2017. At 5.7% YoY, the GDP number had surprised on the downside, given the
market consensus of ~6.5%. One of the main reasons for the poor GDP growth
(which is primarily based on GVA estimates) was a sharp deceleration in growth of
the manufacturing sector; nominal GVA growth of the sector dropped to just 3.8%
YoY from 10% in 1QFY17, the lowest in the new GDP series. The RBI data on NGNF
companies confirms this slowdown. As per our calculations, manufacturing GVA* of
listed companies, which is the basis for quarterly GVA estimation, actually declined
by a record 9.6% after posting double-digit growth in the last four quarters. This
decline was entirely on account of a sharp fall in the manufacturing sector’s net
profit.
Exhibit 9
compares manufacturing GVA growth as per the CSO’s data with
that of the RBI’s sample. There is a high degree of correlation between the two.
Exhibit 10
compares the GVA growth of the manufacturing sector with the sales
growth of the sector. Interestingly, sales growth, which had consistently grown
slower than manufacturing GVA, outpaced manufacturing GVA growth in 1QFY18.
Exhibit 9:
Comparison of manufacturing (nominal) GVA as
per CSO data with that of RBI sample
25
15
5
(5)
(15)
1QFY14
1QFY15
1QFY16
1QFY17
1QFY18
Mfg GVA (RBI sample)
(% YoY)
Mfg GVA (CSO, RHS)
(% YoY) 20
15
10
5
0
Manufacturing GVA* of
listed companies, which is
the basis for quarterly GVA
estimation, actually
declined by a record 9.6%
after posting double-digit
growth in the last four
quarters.
Exhibit 10:
Manufacturing sales growth outpaces GVA
growth in 1QFY18 as per RBI sample
25
(% YoY)
15
5
(5)
(15)
1QFY14
1QFY15
1QFY16
1QFY17
1QFY18
Source: RBI, MOSL
Mfg GVA (RBI sample)
Sales
* GVA is the sum of payments made to all factor inputs. GVA, thus, is calculated as the sum of staff costs, interest paid, depreciation, tax
provisions and net profit. Our numbers are based on an increasing sample.
13 October 2017
3

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24 March 2017
4