With barely a handful of companies surprising the Street, the March quarter earnings season has been a big disappointment. If the headline numbers appear impressive, it’s because a clutch of metal players —Vedanta, JSW Steel, Tata Steel, Hindustan Zinc — have all turned around swinging from loss to profit. The rest of India Inc appears to be struggling; for a sample of 1,182 companies (excluding Reliance, oil marketers and metal players) net sales have gone up just 5% y-o-y. Even if the environment is a relatively disinflationary one, the top line growth has been rather subdued. Several factors are at play, primarily weak demand — both at home and in overseas markets — and intense competition.
While demonetisation dampened purchasing power for FMCG products, consumer durables and two-wheelers, IT players continue to grapple with slower demand. Most drug manufacturers have fared poorly this time around. At Sun Pharma, revenues fell 6.5% y-o-y with the US business facing pricing pressures while at Cipla, revenues from domestic formulations declined 5% y-o-y. Lupin’s revenue rose mere 1% y-o-y with the US revenues falling 15% y-o-y; the Ebitda & PAT plummeted 41% & 49% y-o-y, respectively. Dr Reddy’s revenues fell by close to 5% y-o-y.
At Reliance Power, revenues were flat y-o-y with analysts attributing this to weaker demand and lower generation in Uttar Pradesh. Yields at Interglobe Aviation dropped 6% y-o-y; at Shoppers Stop, stand-alone sales grew just 3% while same-store sales fell 1.1% partly because some stores were temporarily shut for renovation.
Several mid-sized companies have done reasonably well — Rallis, Page Industries and Voltas — but analysts remain cautious. Others such as Just Dial, Dish TV Amara Raja Batteries — turned in numbers that were below estimates.
Rising raw material costs have hurt operating profit margins for a host of companies — for the sample of 1,182 firms — they contracted some 80 basis points.
Despite a smaller tax outflow, net profits have fallen 4.6% y-o-y with no support from other income as seen in the previous two quarters, Q3 and Q2. At ACC, operating margins contracted by 190 basis points due to costlier power, fuel and freight. At Siemens, Ebitda margins were weaker than expected thanks to a sharp contraction in gross margins, the result of an adverse product mix, keen competition and higher other expenses. At Titan, gross margins came off by 400 bps while Ebitda margins fell 80 bps y-o-y to 7.9%, with the increasing level of discounting to capture the post-demonetisation shift to organised opportunity, to grow sales. Costlier steel dented HeroMotoCorp’s operating profits.
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At GSK Consumer, gross margins contracted 200 basis points y-o-y while at Nestle, they fell nearly 300 basis points. Even a high-end player like Asian Paints managed to grow its operating profit by just 2% y-o-y. Colgate’s Q4FY17 earnings were weaker than expected; net operating revenues grew 2% y-o-y while Ebitda grew 1% y-o-y. United Breweries posted a poor set of results; net operating revenues declined 8% y-o-y, well below estimates.
Managements are keeping their fingers crossed, the GST rollout, scheduled for July1, will not be too disruptive. Hero MotoCorp expects the market to look up in the coming months. There is also the anticipation of a good monsoon.
The capex cycle, managements say, is yet to turn with capacity utilisations in capital goods at a sub-optimal 60-70%. As a result, there is no greenfield capex from the private industry and annual expenditure is spent in maintenance, efficiency improvement projects and, in some cases, brownfield capacity expansion.