Prolonged slowdown: CRISIL sees 2% topline growth in Q3

The much-anticipated turnaround in earnings of India Inc is unlikely to take place in the December quarter season, says ratings and research firm CRISIL.In an interview with CNBC-TV18, CRISIL Senior Director Prasad Koparkar says topline growth for companies in the third quarter -- for which companies will start reporting results next week -- is expected to come in at a meagre 2 percent, or levels that have been the norm for a few quarters now.Part of this decline is because of the rout in commodity prices, which will bog down revenue growth for all related sectors such as petrochemicals, metals and oil & gas, etc. "But even ex-commodity, top line growth is likely to be 5.5-6 percent," he said.There is a silver lining for some sectors: those related to urban consumption, such as media, organised retail or telecom are likely to post strong double-digit growth, according to Koparkar, who is also positive on earnings outlook for some export-linked companies such as midcap pharma. There will be bad news for the cement sector, which has been a sector of focus for many investors. "Cement prices barring Southern India have remained depressed. Volume growth is expected to be low though there may be some improvement in margins due to lower fuel and power costs," he said.Below is the transcript of Prasad Koparkar’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Sonia: What is your own expectation for Q3?A: Our prognosis is that the earnings season is going to disappoint. The topline growth is going to be just about 2 percent or so which is what we have been seeing now for the last two or three quarters. On the earnings side, I think earnings before interest, taxes, depreciation and amortisation (EBITDA) margins will improve a bit, maybe by about 60-70 basis points and this is I am talking for a fairly large sample of about 600 companies accounting for almost 70-75 percent of the overall market cap. So, I think it is a fairly representative number and our sense is that at least in December quarter, we are unlikely to see any material green shoots.Latha: Your analysis starts by you telling us that for the quarter ended December 31, revenue growth for your universe of 600 companies is going to be 2 percent. Can you give us the range? Which is the sector with double digit growth? Is there somebody who will give 10-15 percent in terms of revenue and which ones will be the negative?A: Clearly all commodity linked sectors are going to have severe problems whether it is metals, whether it is some of the petrochemical related or man-made fibre or oil and gas. But, even if you remove these commodity linked sectors, the growth improves definitely from about 2 percent that I spoke about, but it still stays below 6 percent. Our sense is that it will be somewhere about 5.5 percent. I think one thing that we need to keep in mind however, is that overall, nominal gross domestic product (GDP) growth has come down from about 13-14 percent, about a year and half back, to about 6 percent now. So, in that context, historically if you see, the corporate topline growth used to be about 1 to 2 percent higher than the nominal growth. In that sense it is not a very drastic slowdown, but yes it is something that kind of takes everyone by surprise. In terms of the sectors which are doing well, I would highlight three or four sectors. Anything that is linked with urban consumption, whether it is passenger vehicles, telecom, media, organised retail, these are the sectors which will most likely deliver double digit growth and the usual suspects like the export linked sectors like some of the midcap pharmaceuticals, even IT on a year-on-year (Y-o-Y) basis thanks to about 6 percent depreciation in rupee on a Y-o-Y basis will deliver 10 percent plus growth.Sonia: But, IT generally, we track it on a sequential basis and this time there is an expectation that things could get worse compared to last quarter. How much lower do you think it could go?A: You are absolutely right and while IT is track on a sequential basis and that too, more in dollar terms, sequential basis, we will see about flattish to about 1 percent decline in topline, in dollar terms for the top IT companies.Latha: How will their margins do? Will it be generally higher or lower?A: Margins again, I think on a Y-o-Y basis are going to decline. While the utilisation levels have gone up over the last few quarters now, and possibly at close to optimal level for most companies, the pricing pressure continues and volume growth is only what is really driving the topline that we are seeing. And given the pricing pressure, we do not see margins improving, we expect pressure on margins to continue for software companies.Latha: If you can wind this up with a comment on the cement sector. That is a sector which investors have been waiting will perform. What will they do in volumes? What will they do in margins?A: Volume growth is still very tepid. Prices expect South India actually, are depressed. South India is the only exception. The only positive for cement sector is a strong improvement in margins. We expect about 150-200 basis point increase in margins. It is largely driven by savings in fuel and power costs because coal prices have come down, people have shifted to petcoke. There are some benefits, but overall, the real story that we are looking at in terms of volumes picking up because of infra investment is yet to be seen.