Indian companies have two tough years ahead — are the markets prepared?

• Indian companies have already seen their profits hit, but now it seems that revenue growth over the near term will also be subdued, according to a report published by S&P Global Ratings.
  
• This is due to a number of external factors such as volatile oil prices, a botched Brexit, an economic slowdown in China and global trade tensions.
  
• The assessments of other brokerages are largely in line with S&P. They expect profit growth to stall and downgrades to happen.
  

Indian companies have already seen their profits hit, but now it seems that revenue growth over the near term will also be subdued, as a number of external factors such as volatile oil prices, a botched Brexit, an economic slowdown in China and global trade tensions come to bear.

These external factors will have a negative impact on corporate earnings and exports growth in India in the next 12-24 months, according to a report published by S&P Global Ratings titled "Indian Corporate 2019 Outlook--Time For Caution”.

The report comes in the wake of disappointing Q3 results for India Inc, especially in the auto, oil & gas, and telecom sectors. Despite a rise in revenues, net profit growth, on a cumulative basis for listed companies, was down as a lack of pricing power put a damper on margins.

However, the market may not have fully priced the upcoming risks yet. “While consensus estimates imply a modest single-digit EPS growth for FY19, FY20 growth is estimated to be more than 20%. This is an extremely optimistic assumption and earning downgrades are, therefore, likely to continue through FY20 too,” India Infoline said in a report dated February 18.

In the face of global headwinds, and pressure on earnings, Indian companies will likely have to dial down their capital expenditure in order to keep their cash flow positions healthy and debt burdens manageable.

However, Indian companies may be able to maintain margins at their current sluggish levels, as opposed to a decline, owing to “low costs, capacity expansion, and benign input prices," said Krishnakumar Somasundaram Vishwanathan, a credit analyst at S&P.

Additionally, India Inc is expected to pare down debt within the next few years, not by choice, but out of necessity, as debt levels reach their highest levels in a decade, predicted S&P.

And higher debt would mean higher interest cost. This may further erode the growth in earnings before interest, tax, depreciation and amortization (EBITDA), which is an indicator of a company’s profitability minus financing and tax costs.

The rise in interest costs has leapfrogged EBITDA growth, as interest expenses now comprise 19.4% of EBITDA, compared to 15.5% a year ago, according to India Infoline.

Lastly, one big area of uncertainty will further exacerbate corporate India’s problems: the national elections.

A victory by the incumbent BJP administration will signal policy continuity and stability, portending a sustained increase in foreign capital inflows as well as strong stock markets and depressed bond yields. However, a shaky coalition government or a victory by the Opposition could endanger this.

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