Tuesday, 23 February 2016 00:00

India's Corporate Sector Sales Growth Recession

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In the last six months the NIFTY index has declined by 19.0% and there are several factors that have contributed to the correction. This includes global economic weakness, currency volatility, increasing geo-political tensions and relatively weak growth in India.

This article focuses on the corporate sector performance in India, which is impacted by local as well as global factors. The key performance indicators justify the recent market correction and with global concerns sustaining, the key conclusion from this analysis is that investors should refrain from any big fresh exposure to Indian equities. While small exposure to quality undervalued names can be considered, I will not be surprised if the markets witness another bout of correction.

Coming to the indicators of corporate sector growth, the first chart gives the sales growth, expenditure growth and EBITDA margin for companies listed in the Indian exchanges.

Indias Corporate Sector Sales And EBITDA Growth

It is clear that sales growth has slumped for H1 2015-16 with companies reporting negative sales growth of 3.5% on a year-on-year basis. The EBITDA margin has improved for the corporate sector during the same period and I believe that this improvement is due to lower energy prices coupled with corporate sector efficiency.

In line with reasons for decline in the equity markets, I attribute the decline in sales to weak global economy. However, the pace of reforms in India has also been slow, but moving in the right direction.

To underscore my point, the chart below gives the cement sector sales growth and EBITDA margin.

Cement Sector Sales Growth And EBITDA Margin

Sales growth has slumped and this is due to weakness in the real estate industry coupled with weakness in the construction industry. The reason for mentioning cement sector growth is the point that this sector can be driven by local factors (independent of global factors).

In particular, India’s infrastructure sector needs huge investments and has huge impending growth, but the growth trajectory has been muted in the recent past. With the budget due, there is hope for revival in key sectors that will drive local growth.

As the chart below shows, the construction industry sales growth has marginally inched higher in H1 2015-16, but growth still remains very weak.

Construction Sector Sales Growth And EBITDA Margin

On the positive side, the corporate sector still has robust interest coverage ratio and I don’t see any balance sheet concerns for a majority of large and mid-size companies. The corporate sector is well positioned to see through the current slowdown, but there can potentially be more weakness in sales in the coming quarters.

It remains to be seen if the budget provides some hope for key sectors. In particular, I would like to see favourable policies for the agriculture, consumer, construction, education and healthcare sector. These sectors can drive GDP growth in India even if global growth remains anaemic.


Chart Source: Reserve Bank of India Monthly Bulletin January 2016

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