In its latest report, Espirito Santo Securities has observed that revenue growth has slowed down considerably, leading to the question of whether a turnaround has happened. Has it?
In a new report dated 19 November 2012, Espirito Santo Securities (ESS) is uncertain when the recovery will pick up as aggregate quarterly earnings of over 400 companies grew only by 4.9% year-on-year (y-o-y), the slowest pace in the last three years. The report said, “Adjusting for inflation, the growth rates look even more anaemic and show how hard volume-led growth is to come by.” The economy has been affected because the global economy has been volatile and uncertain, with Europe and America going through difficult times. Moreover, the Reserve Bank of India (RBI) has taken a firm stance and kept interest rates unchanged (repo rate at 8%), in order to moderate inflation. The sectors which have got affected by the slowdown are industrials (revenues down 8% y-o-y), real estate (revenues down 9% y-o-y), telecom and healthcare. The sector which has performed very well is energy, revenues which grew at an impressive 8.2% y-o-y.
However, the good news is that, according to ESS, margins have improved even though revenue growth declined. This was due to lower commodity prices which translated to lower input costs. EBITDA grew by 13.7% y-o-y while margins expanded by 130 basis percentage points (bps) y-o-y. All the sectors, except consumer discretionary, saw their margin expand including those whose revenues were affected. Real estate, healthcare and energy saw margins expand by 706 bps, 764 bps and 865 bps respectively.
Even though margins expanded, it is not a cause for celebration. Why? Because, according to ESS, demand has still not picked up. The basis of higher margins would not just be lower cost but also higher revenues. As revenues increase, companies will invest more in capital expenses (capex) which is an indication of economy expansion and also creates more jobs. The report said, “A sustainable turn needs a demand recovery, which with the consumer stretched and government under fiscal pressure, needs a turn in the investment cycle, which we still don’t see in the lead indicators that we monitor.” In other words, there’s no sign of the bottom of the investment cycle. Most companies are cautious in putting their capital to work as demand is slack. The fundamental underlying of the economy—demand—must pick up. The report further says, “This hardly lends confidence in sustainability. Meaningful upgrades need a demand revival, led by turn in investment cycle, of which there is yet no sign.”
Check our earnings reports of various companies here. We will be putting up our own earnings analysis shortly. Stay tuned.