November 21, 2017 1:02:21 am
The September quarter earnings season may have turned out to be the best in several quarters but the big concern is that corporate India remains highly leveraged. Consequently, any deterioration in the macroeconomic environment could hurt corporate profits crimping their ability to repay loans.
As analysts at Credit Suisse point out, the share of debt with companies that have an interest cover of less than one saw little change during the September quarter at 40 per cent, only slightly better than the 42 per cent in Q1FY18. This improvement too is the result of Tata Motors having exited the sample. Else, the share of chronically stressed debt — firms which have had an interest cover of less than one for the last four quarters — actually increased 100 basis points quarter-on-quarter to 38 per cent.
The revival in prices of commodities notwithstanding, aggregate debt remains elevated while the ability of companies to repay their loans doesn’t seem to have improved significantly. In the case of steel producers, for instance, the share of debt where the interest cover is less than one remains at a very high 55 per cent. Also, the share of debt with loss-making companies remained at a high 29 per cent.
Many expect earnings to grow by about 20-25 per cent in 2018-19, driven by a rebound in profits for the banking sector which is expected to contribute substantially to the earnings in 2018-19.
The caution stems from the slight deterioration in macroeconomic parameters — the current account deficit, the fiscal deficit and inflation — could deteriorate following the reversal in the prices of crude oil in the last month or so. The BSE 100 companies posted a good September quarter, probably the best in three years; sales grew 10 per cent year-on-year though excluding metals and oil, the increase was a more modest 7 per cent year-on-year. Operating profits for the 100 companies rose a robust 14 per cent year-on-year.
At an aggregate level, however, the performance is somewhat less impressive. For a sample of 1,625 companies (excluding banks and financials), profits stayed flat in Q2FY18; revenues grew 8 per cent year-on-year but with the increase in the total expenditure at just over 8 per cent year-on-year, operating profit margins were crimped, contracting by about 16 basis points.
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