BSE 100 Firms’ Q1 Results Signal Prolonged Demand Slowdown: Credit Suisse
A traffic light signals yellow in the Colaba area during a lockdown imposed due to the coronavirus in Mumbai in April, 2020. (Photographer: Dhiraj Singh/Bloomberg)

BSE 100 Firms’ Q1 Results Signal Prolonged Demand Slowdown: Credit Suisse

The first-quarter results of India’s largest 100 listed companies indicated a remarkably low operating leverage. And that, according to Credit Suisse, raises the risk of a prolonged demand slowdown.

Sales for the BSE 100 companies fell nearly 30% year-on-year in the three months ended June and operating profit declined 35%, the research firm said in a report.

In the U.S., European Union, Japan, and non-Japan Asia, sales fell far less than in India, and operating profits far more, according to Credit Suisse.

Given the context, the mere 1.4 percentage point decline in the BSE 100 EBIT margin was remarkable, particularly as ex-banks (where PBT is used), there was barely any change, the report said.

BSE 100 Firms’ Q1 Results Signal Prolonged Demand Slowdown: Credit Suisse

This shows a sharp drop in costs, indicating a low operating leverage. Companies that have a high proportion of variable costs to overall costs are said to have low operating leverage. Such companies have a lower break-even point.

Within fixed costs at the BSE 100, depreciation rose 7% year-on-year and staff costs increased 1%—the lowest in a decade. But marketing costs and ‘others’ fell 35% and 20%, respectively, the report said. Raw material costs, accounting for 55% of total costs, offset most of the decline in sales, implying widespread pain among the small suppliers and contractors.

BSE 100 Firms’ Q1 Results Signal Prolonged Demand Slowdown: Credit Suisse
“While this helps preserve the risk capital of the larger firms, and furthers ‘bar-belling’ in sectors, it raises the risk of a prolonged demand slowdown.” - Credit Suisse

India’s economy was already growing at its slowest pace in over a decade when the virus struck. The nationwide lockdown, effective March 25, stalled businesses and left millions jobless, pushing the economy to what may be its first full-year contraction in more than four decades.

Segment-Wise Snapshot

  • Sales of the BSE 100 companies fell 30% year-on-year in the quarter ended June.
  • 57% of the decline came from the energy sector (Reliance Industries, oil marketers).
  • 20% of the decline was from autos (Tata Motors, Maruti Suzuki).
  • Remarkably, 17% of the firms in financials, staples, pharma, telecom and IT sectors saw more than 10% growth. Eleven were Financials (SBI, ICICI Bank), the rest staples (Britannia, Tata Consumer), Pharma (2), Telecom and IT.
  • The BSE 100 EBIT fell 35% over the year ago.
  • 70% of the firms saw EBIT decline, while 10% reported more than 30% growth
  • Telecom, healthcare, IT and utilities saw margins improve.
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