Full-Fledged Recovery Still Some Time Away For India Inc: Axis Capital

Continued weakness in credit growth of government-owned banks, stress in rural markets, and weak global commodity prices hit corporate India’s revenue growth in the first quarter, according to a report by Axis Capital.

Of the 176 companies analysed by the brokerage firm, 61 percent reported less than 25 percent profit growth last quarter.

The pick-up in monsoons, the pay commission awards and recent legislative successes of the government, however, augur well for underlying domestic demand and earnings momentum in the second half of the financial year 2016-17, Axis Capital said.

Asset Quality Pain To Stay For Banks

Lead indicators point to a further build-up of stressed assets in the banking sector, according to Axis Capital. In the long term, the brokerage expects some relief for the sector on account of steady reduction in interest rates and increased government spending. However, there may be some treasury gains arising from the fall in government bond yields.

For Axis Capital, the private banking segment is better equipped that its government-owned counterparts, given its higher share of retail business, adequate capitalisation, and limited legacy issues.

Auto: Cost Rationalisation Holds The Key

Auto companies remain cautiously optimistic on demand growth for financial year 2016-17, with both, two wheeler and four wheeler players expecting a pick-up, Axis Capital said.

New launches in the coming months are mainly expected to drive growth for the passenger vehicle makers. However, cost rationalisation measures hold the key for companies like Bajaj Auto who are trying to reduce the impact of rising raw material costs.

Original equipment manufacturers (OEMs) also remain optimistic and expect 12-15 percent growth for the current fiscal. However, demand seems to be moderating sharply for commercial vehicles, the brokerage added.

Cement: Demand Hinges On Good Monsoon, Government Spending

The pick-up in monsoon and higher government spending is expected to boost demand for the cement sector in the second half of the current financial year, according to Axis Capital.

Cement prices have been moving up in North and Central India since the fourth quarter of financial year 2015-16. The drop in prices in Andhra Pradesh/ Telangana during the first quarter of financial year 2016-17 has also been fully reversed due to consecutive price hikes in the September quarter so far. Meanwhile, prices have remained subdued in the west but risen in other regions.

Engineering: Recovery Pushed Back To FY18

The first quarter was robust for the engineering industry, which witnessed strong order inflows driven by higher capital expenditure by the public sector even as capex from private counterparts and exports remained elusive.

The government’s thrust on ‘Make in India’ has started to show some results with a recent notification on mandatory domestic sourcing of select power equipment. However, recovery doesn’t seem to be imminent for the sector, not at least in the ongoing financial year, Axis Capital said in its report.

FMCG: Volume Growth To Pick Up

Pressure on volume growth remains the key concern for fast moving consumer goods sector, according to Axis Capital.

The sector saw weak rural demand in the first quarter of the current financial year on account of delayed monsoons and a cut in government spending. However, demand is expected to revive underpinned by better monsoon, and increased Direct Benefit Transfers.

Meanwhile, urban demand is also expected to pick up driven by spending post One Rank One Pay Pension scheme and the Seventh Pay Commission awards. Axis Capital expects demand recovery to kick in from financial year 2017-18 for the consumer discretionary sector.

IT Services: Cautious Outlook

The outlook for IT sector remains cautious for September quarter, which otherwise is a seasonally strong quarter, mainly on account of macro headwinds and challenges in Banking Financial Services and Insurance (BFSI) vertical.

With traditional IT spends – the forte of Indian vendors – under pricing pressure and clients channelising spends toward digital initiatives, internet of things, cloud etc, there is a risk to revenues from core Application Development & Maintenance services and the enterprise solutions segment.

Pharma: Price Erosion In Base Portfolio

Companies with strong U.S. pipelines such as Aurobindo Pharma (seven launches in the first quarter; 134 ANDAs pending approval) and those with continued exclusivities (Lupin with Glumetza) benefitted in the first quarter. However, higher price erosion, to the tune of approximately 5 to 10 percent, coupled with regulatory overhang impacted growth.

Telecom: Seasonal Weakness

The September quarter usually is a seasonally weak quarter for telecom companies, which has recently seen the entry of Reliance Jio with its offer of freebies. Reliance Jio’s move is expected to highten pricing aggression and competition in the space, where EBITDA margins are already under pressure.