Fall in June quarter revenue reflective of economic slide

The BSE Sensex, India’s benchmark stock market indicator, has fallen by more than 2,500 points, about 7%, in the last month. Stock markets are sometimes driven by completely exogenous factors in the international economy. However, part of the current fall in Indian stock markets could be a result of listed companies reporting weak earnings.

Twenty out of 30 companies that are listed in the Sensex had declared their June quarter results as of 1 August. They were Asian Paints, Axis Bank, Baja Auto, Bajaj Finance, Bharti Airtel, HDFC Bank, Hero MotoCorp, Hindustan Unilever, ICICI Bank, IndusInd Bank, Infosys, Kotak Mahindra Bank, Larsen & Toubro, Maruti Suzuki, Reliance Industries, Tata Consultancy Services, Tata Motors, Tech Mahindra, Vedanta and Yes Bank.

Ten out of these – Bajaj Auto, Hero MotoCorp, Hindustan Unilever, Infosys, Maruti Suzuki, Reliance Industries, TCS, Tata Motors, Vedanta and Yes Bank reported a decline in revenue growth. Six out of these 10 – Bajaj Auto, Hindustan Unilever, Maruti Suzuki, Reliance Industries, Tata Motors and Yes Bank — have seen their revenue growth decline for two consecutive quarters.

The worst hit companies among these are in the automobile sector – Bajaj Auto, Maruti Suzuki, Hero MotoCorp and Tata Motors — that have shown negative or single-digit growth in revenue in the last one year. Another company that has reported a decline in revenue growth is consumer goods giant Hindustan Unilever.

Annual growth in combined revenues of these 20 companies was 6% in the quarter ending June. This is the second lowest revenue growth in the last three years. The quarter ending March 2019 had the lowest revenue growth during this period. To be sure, profits are still rising. However, companies are also cutting costs. This can be seen from the fact that spending growth is closely linked to revenue growth. A cutback in expenditure by some of India’s biggest companies does not bode well for economic activity and growth.

The headline numbers given above do not capture the full extent of the crisis in the real economy. Of the 20 companies that have declared results so far, seven — Axis Bank, Bajaj Finance, HDFC Bank, ICICI Bank, IndusInd Bank, Kotak Mahindra Bank and Yes Bank — are in the financial sector. There is a marked difference between the performance of financial and non-financial sector companies. The latter have underperformed significantly in terms of both profit and revenue. This suggests that the real economy is in a bigger crisis.

A better performance has not helped the stocks of financial sector companies, though. They have lost more in terms of marker cap than the non-financial sector companies since the end of the June quarter until August 2. This is probably driven by the fact that a slowdown in the real economy will eventually catch up with the financial sector companies as well.