The Q1 FY20 Business Confidence and Performance Index (BCPI) Report

BCPI Methodology

  • Over 150 Chief Executive Officers and Chief Financial Officers responded to our quarterly BCPI survey, which was run in early April, 2019
  • Respondents are asked to indicate the following:
    • Their outlook on current and future (3 months from today) macroeconomic conditions
    • Business performance on 5 parameters (sales, confirmed new orders, net profit, net hiring, and capacity utilisation) in the most recent quarter, and one quarter ahead on an ‘Up’, ‘Down’ and ‘Same’ scale
    • Whether or not they have made/will make new capital expenditures in a specific quarter
    • Spending on the ‘soft things’: advertising and marketing; team/morale building exercises (offsites, company parties, etc); and aggregate travel expenditure
  • The ‘headline’ (overall) BCPI is a weighted average of current conditions (40%) and expected future conditions (60%). In turn, each of these is a composite of:
    • Macroeconomic conditions (25%)
    • Business performance (60%) on the 5 parameters noted above
    • New investments (15%)  
  • Index values can ranges between 0 and 100:
    • Values above 50 indicate a net positive outlook on a particular parameter (more respondents say ‘Up’ than ‘Down’)
    • Readings below 50 suggest a net-negative view (more say ‘Down’ than ‘Up’)
    • Hypothetically, a value of 100 would suggest that every respondent has a positive outlook, while a value of 0 would indicate the opposite

BCPI Q1 FY20: Headline Results

The Q1 FY20 BCPI: Gently recovering…

After bottoming out in October, IMA’s BCPI index has rebounded, climbing to 60.4 in Q1, FY20 – solidly above the cross-over point that signals net optimism/expansion. Core business performance, though appears to be flagging.

…led by an all-round lift in expectations

  • The macro-economic outlook, having slumped in late 2018, has been brightening, but remains cautious
  • Capital expenditure is also on the mend, rising from the recessionary (sub-50) levels seen for much of 2018
  • The business performance index has regained buoyancy in the last two quarters, and is holding above 60
  • Although this signals a fair degree of optimism, on several business parameters, firms have been consistently tempering their expectations over the last 6 months (see subsequent pages)

A widening Industry-Services gap (1/2)

  • Over much of 2018, industrial and services firms moved in tandem in terms of their overall ‘business confidence’
  • However, a widening gap has opened up this year, growing to over 13 points in the latest survey
  • Services firms had a bigger ‘crisis of confidence’ with the macro environment in October, but quickly recovered. Their business performance scores have also climbed back quickly
  • In comparison, industrial firms have seen a steady drop in business performance (see next page)

A widening Industry-Services gap (2/2)

The Macro Outlook: Normalising

Just 20% of respondents believe that macro conditions have improved in the last 3 months – and slightly more think they have worsened – but twice as many expect things to improve by July, and few (11%) expect further deterioration. These levels – 40% ‘up’, 50% ‘unchanged’ – are broadly in line with the longer-term averages.

Sales and New Orders: Holding up

  • Slightly more than 40% of companies saw sales and new orders strengthen QoQ in Jan-Mar, and about as many expect a continued pick-up in Apr-Jun
  • On the flipside, a quarter of all firms report slowing sales growth in Jan-Mar, and about one in five have seen or expect to see a mark-down in that respect

Profitability, Capacity Utilisation: Steady

  • A steady 37-39% of companies are reporting rising profitability on a quarter-on quarter basis, while about a fifth are seeing a downtrend trend
  • On the whole, capacity utilisation rates are edging up, but at a slowing pace. A significant share (~20%) are seeing a decline in utilisation rates – indicative of a capex cycle that has not yet fully turned upwards

New Hiring: weak, CapEx: slow turn up

  • Hiring appears to be weak, with fewer firms each quarter reporting an uptick, and more reporting a slowdown
  • Close to two-thirds of firms expect to make capital investments over April-June – a big jump – but it remains to be seen whether intent translates to actual capex

Business Parameters: YoY comparisons

  • Seasonality is always a factor in business performance
  • Historically, business-parameters indices tend to peak in Q3 before dropping off in Q4 and Q1
  • However, in FY19, Q3 was weaker, and the fall in Q4 steeper, than usual
  • Trendlines suggest that business performance weakened for most parameters over the course of the year, barring:
    • Profitability (moved up)
    • Capex (held steady)

‘Soft spending’: Weakening

Broadly in line with recent trends, spending on advertising and marketing, and on team/morale-building is edging downwards. Travel expenditure is expected to see a mild increase over April-June, but remains constrained.

Full-year revenue growth: Strengthening

  • In FY19, the median firm posted top-line growth of 5-10%, while 22% of businesses saw negative growth and 15% a jump of 20% or more
  • In FY20, the median is expected to climb to 10-15%, with fewer companies (16%) degrowing and slightly more (17%) seeing a 20%+ rise

Net Profit growth: On the rise

  • Profitability is plainly recovering
  • At the median, net profit growth in FY19 was 5-10%, but it is forecast to move up to ~10% this fiscal
  • A third of companies saw falling net-profit in FY19, but this share is expected to come down to 22%. Roughly one firm in five has seen or will see 20%+ growth in net profit.