If you had pinned your hopes on corporate earnings after seeing the spill the markets took on Monday caused by the fine print in Budget 2019—the biggest intra-day fall in four years—brace yourself for more bad news. A report from CRISIL Research sees corporate revenues growing around 5-6%, which is way too low when compared to an average revenue growth of 14-15% in the past four quarters. CRISIL Research’s estimation is based on an analysis of 295 companies, which account for nearly 60% of the market capitalisation of the National Stock Exchange. The analysis excludes banking, financial services and insurance (BFSI) and oil sectors.

“Automobiles, one of the key sectors driven by consumption spending, continue to reel under a demand slowdown” says Miren Lodha, Director, CRISIL Research. Lodha adds that higher cost of ownership continues to dampen consumer sentiment for passenger vehicles, while commercial vehicle sales are being impacted by new axle norms, inventory build-up and liquidity crunch. “This also impacts ancillary sectors such as auto components and tyres, which are expected to report lower growth,” Lodha adds.

Fast moving consumer goods (FMCG) companies are also affected. “Weakened rural consumption and a high base are expected to cause a moderation in growth,” Lodha opines. And, adding to the pain from a slowdown in consumption is a fall in realisations in key commodity categories, which supported revenue growth in fiscal 2019, especially in the first half of the fiscal. An expected softening in commodity prices will moderate growth in sectors such as steel, aluminium, natural gas and petrochemicals,” says the CRISIL Research note.

Besides softening commodity prices, a slow weakening of the rupee, at nearly 4% year-on-year compared with close to 8% on average over fiscal 2019, is expected to scrape some growth off key export-linked sectors such as information technology (IT) services. Revenue growth for the IT sector, in CRISIL Research’s view, is expected to moderate to nearly 12% year-on-year compared with the close to 17% average growth rate over the past four quarters.

However, amid the dark clouds, there is a silver lining as the decline in revenue growth, is somewhat cushioned by sectors such as airline services, cement, and sugar where price hikes have aided realisations and consequently led to top-line growth.

With the top-line declining, India Inc. is also staring at lower profitability at the operating level. “Growth in operating profit, or EBITDA, is expected to be lower at around 3% year-on-year compared with close to 13% on average in the preceding four quarters,” says Prasad Koparkar, Senior Director, CRISIL Research. “Operating margin is seen contracting up to 50 basis points to nearly 19.5% as top-line shrinks,” Koparkar adds. However, CRISIL Research is of the view that an expected softening in prices of most of the common commodities and crude oil year-on-year is expected to limit margin erosion as end-use sectors benefit from lower input prices.

Further, in CRISIL Research’s view, domestic prices of flat steel and aluminium are lower by around 5% and 15% respectively, while long steel prices will report only a marginal increase of around 1% year-on-year in the first quarter. Additionally, oil prices are estimated to lower by 8% year-on-year. Thus, while lower realisations for commodities will impact revenue growth this quarter, a fall in commodity prices will lend support to profitability for end-use sectors.

While, the benefits are pretty limited, markets should be worried about finance minister Nirmala Sitharaman taking cognisance of the fact that “crude prices have softened from their highs.” In her maiden Union Budget on July 5, Sitharaman said that softened crude oil prices give her room to review excise duty and cess on petrol and diesel. And, she proposed to increase special additional excise duty, and road and infrastructure cess by a rupee a litre on petrol and diesel. This budget proposal, when approved, is bound to have an impact on inflation and consumption.

Clearly, India Inc. has a tough time going forward. The remaining hope for D-Street struggling under a bear hug? The rain gods.

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