1. Some sparkle but India Inc’s recovery still elusive

Some sparkle but India Inc’s recovery still elusive

Revenue growth remains muted, so is pricing power

By: | Mumbai | Published: October 31, 2016 6:03 AM
Weak demand for consumer and capital goods, competitive intensity and a slowing global economy are among the main factors hurting growth. (PTI Image) Weak demand for consumer and capital goods, competitive intensity and a slowing global economy are among the main factors hurting growth. (PTI Image)

While several companies — Reliance Industries, Maruti Suzuki and Bharti Airtel —have turned in very good numbers for the September quarter, the disappointments too are many, among them Hindustan Unilever, ACC, TCS and Idea Cellular. All in all India Inc’s recovery is taking longer than anticipated because revenue growth remains muted even as the additional benefit of softer commodity prices is wearing off; the ratio of raw material costs to sales fell just 12 basis points in Q2FY17 compared with falls of 289 bps, 200 bps and 514 bps in the previous three quarters.

Weak demand for consumer and capital goods, competitive intensity and a slowing global economy are among the main factors hurting growth. Although the rains have been plentiful it could be a while before companies are able to push through volumes meaningfully and regain pricing power as suggested by a few trends across sectors.

For instance, sales of commercial vehicles have stayed subdued in the last few months partly because of a heavy monsoon but also because demand for transporting cargo has not picked up. Although demand for trucks should be better in the busy season the uptick, analysts say, might not be significant. The performance of a core sector player like ACC is evidence of how sluggish the economy is. In Q2FY17, ACC reported a 10% y-o-y fall in cement sales, a new low for the company, which has been hard pressed to grow volumes for many years now. With costs rising — freight up 8% y-o-y — the firm saw a drop in ebitda, down 15% y-o-y.

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JSW Steel reported average numbers with good volumes but unless steel prices rise meaningfully, profits could be under pressure; Q2FY17 saw a sequential drop ebitda /tonne following a fall in steel prices. Other firms in the infra sector continue to fare poorly; Adani Power reported weak numbers even though it has accounted for compensatory tariffs which are yet to be finalised. At ABB, while revenues were weak, order inflows were strong, rising 30% y-o-y.

Again, the fact that consumer demand remains dull is clear from the fact that most housing finance companies have reported a fairly sharp slowdown in disbursements in Q2FY17 to sub-15%. They have also indicated a moderation in the retail segment over the next few quarters. Even HDFC’s disbursements to individuals although good at 20%, was lower than in Q1FY17. Two-wheeler manufacturers are unlikely to post any unusually good sales volumes during the festive season; one player indicated the industry growth would be limited to single digits. Analysts estimate earnings for HeroMotocorp’s will grow by just 6% compounded between FY17-FY19 given volumes are likely to grow at this pace during this period. Operating margins, they believe could be under pressure.

The headline numbers for Q2FY17 aren’t anything to write home about: at 6.2% year-on-year, the increase in net sales — for a sample of 417 companies (excluding banks and financials) — is subdued to say the least suggesting pressure on both volumes and price. With expenditure being reined in, operating profit margins have risen by about 110 basis points y-o-y.

Adjusted net profits have risen just 10.31% y-o-y. Demand in the rural markets remains muted.

HUL’s domestic consumer business grew just 2% y-o-y, thanks to a fall of 1% in underlying volumes and weak 1% growth in net operating revenues missed expectations.

At Dabur too, both volumes and value were weak thanks to which the domestic FMCG business grew just 2.4% y-o-y. The management indicated it might need to spend more on promoters in the light of muted demand prompting analysts to trim earnings estimates by 3-4%.

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