India's Q1 growth slows, but not a meltdown: Kotak report

Mumbai: Slowdown, the first quarter (Q1) of the current fiscal actually saw very high divergence in performance and outlook across companies suggesting slowing growth but not a meltdown, brokerage firm Kotak Equities said on Wednesday. "Q1FY20 review offers varying degrees of slowdown across companies. 'From slowdown? What slowdown? to it is tough and getting tougher', 1QFY20 saw very high divergence in performance and outlook across companies," a Kotak Equities Report said.

"The aggregate picture suggests slowing growth (but not a meltdown), easing revenue environment, continued belt tightening, still-healthy profit growth. Ind-AS 116 (accounting standards) adoption introduced a fresh round of noise in the numbers. Select stocks, even in the tier-1 pack, have seen good correction and are getting closer to the fair value zone", it said. Aggregate revenue growth for the companies stood at 8 per cent for Q1 of the current fiscal a step down from the 9.8 per cent print in fourth quarter of the financial year 2018-19 and 12-15 per cent prints from Q1-Q3 FY19. According to the report, the 8 per cent aggregate revenue growth print for the quarter in consideration was at the higher end of the 2-9 per cent range from Q1-Q4 of fiscal 2017-18.The Kotak report questions whether the demand environment has really slowed down as much as suggested by the 700-odd basis points (bps) gap between the 15 per cent aggregate growth in Q3 of fiscal 2018-19 and 8 per cent recorded in the first quarter of this fiscal.

The report wonders whether the 12-15 per cent figures for the first to third quarters of the last fiscal are a one-off boost received from GST implementation and whether what is being seen now is just a normalization, with the one-off kicker now in the calculation base."We believe the answer, as it usually tends to be, is somewhere in the middle. There is some underlying demand slowdown, for sure, but the deceleration is not as sharp as the reported growth narratives suggest", the report said.

It points to "remarkable" growth divergence across companies. Most companies suggested a sharper slowdown in rural growth rates than urban. Dabur's growth outperformance suggests otherwise. Dabur's 9.6 per cent volume growth print was the highest among staples companies and by a margin nearly twice the rest.

"Dabur is generally seen as the stock to play the 'rural' theme and here we have the company report the highest growth in a quarter where nearly all companies suggested a sharp rural slowdown," it said.The report also said that Asian Paint's standalone volume growth at 17 per cent is the second highest year on year (yoy) growth print since the third quarter of fiscal 2011.Ind-AS 116 accounting standards adoption has introduced a fresh round of noise to the numbers, said Kotak.

"We haven't had clean numbers for yoy comparision trends for a long time now. Yoy EBITDA growth comparisions, on a reported basis, for 1QFY20 were generally meaningless as part of EBITDA costs moved below the line. Profit before tax (PBT) and Profit after tax (PAT) impact was marginal for most companies. "Aggregate PBT growth for our coverage universe accelerated to 11.9 per cent yoy (year-on-year) from 4QFY19's 8 per cent print," it said.

"Acceleration wasn't broad-based, however; it was quite skewed, in fact with just five companies (Asian Paints, Pidlite, Dabur, Marico, and United Spirits) accounting for a bulk of the swing," it added. Britannia, Titan and Jubilant Oranosys saw the sharpest deceleration in profit before tax (PBT) growth; Hindustan Lever's and ITC's PBT growth were similar to levels of the fourth quarter of last fiscal.

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