In FY15/16, operating expenses grew much slower as compared to profits for Indian corporate

Brief: Overall Indian corporate performance will be supported by consistently low input costs; In FY15 and FY16, gap between profitability at operating level and operating expenses only widened and is expected to follow the trend in FY17/18 as well; a recovery in European inflation levels is good for the demand side but may prove detrimental for the supply side due to significant backward integrations

Impact: Neutral

As per RBI and CSO data, the overall Indian corporate performance remained healthy in FY16 and this point's towards a consistent FY17 & FY18 number; given raw material costs remained low for much of these years. The operating profit of the overall industry expanded by 13% as against operating cost, which grew by just 5.3%. We believe that the wider margin between respective growths in profit and cost is attributed to not only lower raw material costs but also improvements in supply chains. Compared to FY15, the gap in FY16 has been wider still and is expected to have continued in FY17 as well.

Crude oil price has slipped to $50 per barrel in 2015 and continues to languish below that range ($45-50) for much of the following years. Similarly, basic metal prices has dropped by (-) 12% during FY15 and FY16. However, these lower input costs had lower incremental benefits owing to a poor global economic outlook. As a result, sales growth of the overall industry has slowed down to 6% in FY16 as against 13.2%, the previous year.

At a sub-sector level, steel industry saw poor performance with a negative production and losses at operating level – a phenomenon that is widely understood. At the time, cheaper Chinse imports were playing havoc with the domestic industry, the situation has changed since then and FY17 onwards, there have drastic improvements in overall performance metric. The industry has recorded a healthy production growth of 10.7% in FY17; raw material cost for steel industry was also low in FY17 and demand was robust. Therefore, operating profit of the industry is expected to remain healthy in FY17. Notably the negative growth in FY16 in profitability at operating level was also owing to a strong base factor.

Electrical Machinery, on the other hand, has recorded highest growth in operating cost (20%). The industry has also accumulated higher inventory level in FY16 and as a result, production has contracted by (-) 4.3% in FY17. Electric Machinery & Apparatus has been one of the vulnerable sectors operating on very thin margins given high competition from cheaper alternative markets. Also, as demand (both domestic and international) declined inventory levels increased and incremental production did not convert into sale. Rising costs in Europe had an impact on operating expenses as well since the industry draws upon a significant backward integration with the continent. The performance was expected given the capital intensive nature of the business; however, we believe that FY18 numbers will be stronger as cost of capital may go down – complimenting domestic economic expansion.

 

Sectoral Growth (%)

Year

Sales

Inventories

Production

Value of production

Operating expenses

Operating profit

Food Products & Beverages

FY15

10.2

19.2

5.99

10.2

10.0

14.6

 

FY16

10.1

15.0

-5.57

10.0

9.6

17.0

Textiles

FY15

7.1

5.6

3.78

6.7

6.0

15.0

 

FY16

2.7

7.9

2.18

2.6

2.9

-0.8

Pharmaceuticals & Medicines

FY15

11.8

8.5

2.79

11.3

9.8

22.3

 

FY16

10.2

11.9

13.39

10.3

8.3

24.4

Iron & Steel

FY15

10.4

18.9

5.12

10.9

10.0

42.5

 

FY16

0.7

-0.4

-1.29

-0.5

-0.4

-3.5

Electrical Machinery and Apparatus

FY15

11.1

1.6

3.95

10.0

8.7

25.1

 

FY16

18.3

15.2

5.32

19.1

19.8

11.6

Machinery and Equipment nec.

FY15

12.0

9.0

-0.05

12.1

10.8

22.2

 

FY16

12.8

-0.6

2.16

11.8

12.3

8.9

Motor Vehicles and Other Transport Equipment

FY15

7.2

8.0

3.5

6.9

5.5

42.4

 

FY16

10.3

5.9

1.42

10.9

11.3

3.4

Manufacturing

FY15

10.6

11.1

3.82

10.7

10.8

9.4

 

FY16

5.0

5.5

3.03

4.7

3.5

21.1

Construction including Civil Engineering

FY15

8.8

14.9

 

13.8

8.3

58.1

 

FY16

8.9

10.3

 

5.8

5.0

10.2

All Industries

FY15

13.2

14.2

4.07

14.0

13.2

21.9

 

FY16

6.6

8.5

3.42

6.0

5.3

12.9

Source: RBI; CSO; SMERA Research

Our exciting journey started in 2005 with rating of bank borrowers most of whom were small and medium enterprises. At that time, credit rating was a concept known only to large issuers of capital market instruments. Since then, like a caterpillar transforms itself into a beautiful butterfly, we transformed to rate bonds, bank facilities of large corporates and issuers across industries. Along came many achievements - SEBI Registration in 2011, RBI accreditation in 2012, 50,000 ratings in 2018, 5,000 Bond and Bank Loan Ratings in 2017, launch of India's first Android and iPhone app to disseminate rating, tamper-proof QR-code-enabled rating rationales, and SMERA Terminal to name a few.

Now is the time to re-emphasize our increasing footprint across all segments of ratings through the launch of our new name - 'Acuité'.

The name has changed. The spirit of upholding highest standards of analytical rigour, continuous improvement, excellence in our processes and quest for innovation remains the same. We would like to re-emphasize that we will continue to work hard to provide independent, unbiased and timely opinion of highest standard.

Acuité means 'sharpness and clarity of thought and vision'. Let our research and ratings help you take decisions with confidence.


Sankar Chakraborti
CEO