This was reflected in the sharp slowdown in growth in gross fixed capital formation during the two quarters to 3.6 per cent and 4 per cent and the slowdown in cement production volume growth. The earnings before interest, taxes, depreciation and amortisation (EBITDA) margin, however, reflect an optical improvement of 136 basis points on a year-on-year basis and remained flat sequentially at 17.7 per cent in Q1 FY20.
This was largely on account of the transition to Ind AS 116 whereby operating leases have been capitalised by companies, thereby reducing rental costs and increasing depreciation and interest outgo. Profit before tax (PBT) margins, on the other hand, contracted on a year-on-year basis by 114 basis points to 7.8 per cent and improved sequentially.
"The weakness in the consumer-linked sectors has been visible in multiple sectors," said Shamsher Dewan, Vice President and Sector Head of Corporate Sector Ratings at ICRA. "Automobiles sales reported sharp double-digit decline which has continued into the current quarter as well while FMCG companies reported a sequential slowdown in volume growth in both rural and urban markets."
However, bucking the trend, companies in the consumer durables sector reported growth during the quarter on the back of sales of cooling products due to the extended and harsh summer. "The contraction in PBT margins was due to the subdued volumes, negative operating leverage, high discounting and tepid realisation in select commodity sectors, especially metals," said Dewan.
The interest coverage ratio of ICRA's sample, adjusted for sectors with low debt levels (IT, FMCG and pharmaceuticals) witnessed a decline to 3.5x from 4.1x in Q1 FY19 and 3.7x in Q4 FY19. This was driven by a sharp year-on-year increase of 22 per cent in interest costs on account of higher interest rates, increase in debt levels and Ind AS 116 adjustments on account of which lease rentals have been bifurcated into interest and depreciation costs.
Sectors like oil and gas, telecom and construction saw a significant increase in interest costs on a year-on-year basis. In terms of sector-specific trends, consumer-linked sectors like automobiles and FMCG reported weakening.
Within the automobile sector, the passenger vehicle segment registered a decline of 18 per cent in domestic sales in Q1 20 on a year-on-year basis because of high base and weak customer sentiments, partly contributed by rising ownership costs (fuel, EMIs and insurance). The two-wheeler wholesale dispatches declined 12 per cent during the quarter because of weak consumer sentiments, increased cost of ownership and rural slowdown.
Although FMCG companies reported volume growth, there was a sequential slowdown in volume growth in both rural and urban markets. Among other sectors, the IT sector reported strong revenue growth of 10 per cent in Q1 FY20 (in rupee terms) supported by rupee depreciation on a year-on-year basis and traction in digital offerings across verticals.
Cement volume growth slowed to 1.8 per cent due to slowdown in project execution on account of general elections, economic slowdown impacting private sector capacity expansion as well as liquidity issues and labour scarcity. Steel consumption, on the other hand, grew by 7 per cent during the quarter on a year-on-year basis.