Business Confidence and Outlook: Q4FY22

Corporate expectations have been hit by Omicron-related uncertainties. The Q4FY22 (Jan-Mar) edition of our quarterly Business Confidence and Performance Index (BCPI) survey shows that optimism has tempered. At a recent joint session of the India CXO Forums, we presented the main findings of the latest BCPI edition. This was followed by a discussion amongst members on the outlook for their industries. This paper summarises the key takeaways.

The BCPI has fallen from a multi-year high in October

Tempering Business Expectations…

The headline BCPI index fell from a 6-year high of 77.4 in October to 66.6 in January. (Values above 50 indicate net optimism and those below 50, net pessimism.) Expectations around business performance – sales, new orders, net profit, hiring and capacity utilisation – broadly tracked the overall index. Encouragingly, capex sentiment fell only marginally, staying well above the 50 mark, and 70% of companies plan to make or sign-off on new investments in Q4. Our members report that sector-specific PLI schemes are likely to be a prime driver of investment.

Services companies are more optimistic than manufacturers

Services firms maintained a lead over manufacturing companies in terms of net optimism, but – owing to the fresh restrictions imposed because of Omicron – saw a steeper QoQ decline in their outlook. Sector-wise, construction firms were ahead of other industries, followed by BFSI and IT/ITeS, while chemical manufacturers and consumer-goods firms were at the bottom of the ladder. Hiring intent – often a bellwether of future expectations – is the highest among IT/ITeS, healthcare and BFSI companies but relatively subdued in other industries.

Revenue- and profit-growth projections are lower for the short term

In terms of revenue growth, the industry-wide average in Q3 was a healthy 14% but this is projected to fall to 10% in Q4. Net profit growth is expected to fall only marginally QoQ, to 8% (from 9% in Q3). B2B companies are doing slightly better than B2Cs – presumably on account of restrictions on mobility and contact-based services. Sectorally, only financial services and healthcare businesses project a QoQ rise in revenue and profit growth.

The net negative impact of Omicron appears to be limited. Most companies say that there is no change in their plans for new product launches, hiring, M&A etc. The latest wave has only disrupted return-to-office plans and short-term revenue and profit projections. Work-from-home ratios have spiked but the trend is expected to reverse soon.

Huge churn is visible in the auto sector

Sectoral Snapshots

Across industries, the top-of-mind concern today is supply-chain disruption, which has driven up freight and commodity prices. However, there are significant sector-wise variations.

The automotive industry is undergoing churn, particularly with the shift towards EVs, especially in the 2W segment. However, this is also driving investments. Sales growth remains low across all of the main segments. Within the 4W segment, SUVs are doing better than sedans and hatchbacks.

Electronics is doing well while hotels are struggling – but domestic travel has started to pick up

There is broad optimism in the ESDM (Electronic System Development and Maintenance) segment, particularly with the PLI scheme for mobile phones having taken off strongly. Conversely, a huge debt burden is building up in the hotel industry, which has seen a period of prolonged stress. Even as the government’s loan-guarantee schemes have helped businesses to survive the last few quarters, the debt covenants continue to be a pressure point for distress. Encouragingly, domestic corporate and wedding-related travel has picked up sharply.

Demand for cloud services and therefore data centres has surged

In telecom, demand for cloud-based services has surged, leading to a sharp growth in investments in data centres. The industry projects that by the end of FY23, India’s data-centre capacity, commonly measured in megawatts (MW), will have doubled from 500 MW to 1,000 MW. Moreover, the next 3-4 years should see additional installations of 150-200 MW annually. The established players are expanding while new ones are entering the market.

Jewellery demand has held up strongly…

Notably, the jewellery business did not shrink but rather expanded as a result of the pandemic. Consumers have diverted savings into jewellery, with the major players seeing a ~40% increase in revenue. This comes mainly from a rise in the number of customers, with the average ticket size remaining unchanged. However, recent regulations, which require the mandatory hallmarking of jewellery above a specific weightage, have the potential to disrupt the market.

…but there are signs of weakness in rural demand

Average Revenue Per User (ARPU) for rural DTH (direct to home) services is rising, but the number of customers is not. Other short-term indicators of rural demand have recently weakened, including fertiliser and tractor sales – though these do tend to be seasonal in nature. The chemicals industry has seen several headwinds, including regulatory and financial constraints but end-demand remains strong. This has kept company valuations high, suggesting that M&A activity in this industry will be selective and strategic. Finally, growth in the textiles industry will be guided by geopolitical factors – notably the China+1 strategy being adopted by many MNCs.