India Inc Has To Strike A Balance Between Revenue Growth And Profitability

The revenue growth of India Inc seems to have slowed down in the last quarter. It is estimated to have clocked a slower revenue growth of 5-7 per cent on-year for the three months ended September, marking the slowest pace in the past 16 quarters. And that’s not without reasons. The slow-down in revenue growth can be attributed to a stagnant performance in the construction vertical, a decline in the industrial commodities vertical and subdued growth in investment-linked sectors. Lest one forgets, construction vertical accounts for a fifth of India Inc revenue. Interestingly, the same companies had posted an 8.3 per cent growth in the April-June quarter. CRISIL Research recently conducted an analysis on 435 companies and the findings subscribed to the same view. The good news, however, is that India Inc’s profitability is estimated to have improved 70-90 basis points (bps) on-year during the quarter. The overall earnings before interest, tax, depreciation, and amortisation (Ebitda) for the 435 companies grew nearly10 per cent on-year. Among the top 10 sectors, which account for nearly 75 per cent of revenue, eight saw EBITDA margin expansion, led by export-linked sectors such as IT services and pharmaceuticals, investment-linked sectors like power, and consumer discretionary sectors, including automotive and telecom services.

The two sectors that faced margin contraction were steel, due to higher iron ore prices, and cement because of subdued pricing. For IT companies, the EBITDA margin expanded 110-130 bps due to higher employee utilisation and lower attrition rates. In pharma, topline growth and lower raw material costs led to margin expansion of 320-340 bps for formulation players. In the bulk drugs segment, recovery in exports and higher realisations led to 230-250 bps margin expansion. Among investment-linked sectors, a fall in coal e-auction premiums improved margin by 130-150 bps on-year for power generation companies. As regards consumer discretionary sectors, telecom services’ margin expanded 120-140 bps due to lower licence fees, spectrum charges and network operating expenses, along with steady revenue growth. In the steel sector, while coking coal prices dipped on-year, iron ore prices rose on global cues, increased export demand and strong domestic demand, resulting in a margin contraction of 40-60 bps on-year.

The cement industry's margin also contracted 110-130 bps due to subdued pricing and despite easing cost pressures. Revenue of industrial commodities, investment and construction-linked sectors—collectively accounting for close to 38 per cent of CRISIL’s sample set—grew only one per cent, weighing down overall performance. The industrial commodities sector, such as coal, saw a 6-7 per cent revenue decline due to lower coal off-take, coal-based power generation and e-auction premiums. In the investment sector, the power segment (nearly 70 per cent revenue contribution), grew by just one per cent as above-normal monsoon reduced power demand. Among construction-linked sectors, steel revenue fell 2-3 per cent, following price drop led by cheap Chinese imports. One of the key challenges ahead for India Inc is to strike a balance between revenue growth and profitability.