With metal producers turning in sterling numbers, the earnings season has acquired some sheen. Else, muted revenue growth — a combination of both weak demand and high competitive intensity — coupled with a rise in raw material prices have seen profit growth stay subdued. Aggregate numbers have been boosted by the performance of metals players: Tata Steel’s consolidated Ebitda soared 213% year-on-year while the jump at Vedanta was 112% y-o-y, at JSW Steel 64% y-o-y and at Hindustan Zinc 187% y-o-y.
While aggregate revenues for a clutch of 651 companies (excluding banks and financials) have risen 13.54% year-on-year, the growth would have been far more muted — 6.01% — without the presence of metal manufacturers and Reliance Industries.
Top lines have been muted at IT services firms, telcos and two-wheeler manufacturers. However, there are firms like Maruti Suzuki that earned better realisations. 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, standalone sales grew just 3% while same-store sales fell 1.1% partly because some stores were temporarily shut for renovation.
Meanwhile, higher input costs are beginning to hurt; at ACC, for instance, operating margins contracted by 190 basis points due to higher power, fuel and freight expenses. 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 dropped 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.
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Higher fuel prices hurt Interglobe Aviation while higher steel prices dented HeroMotoCorp’s operating profits.
Despite demonetisation woes, Hindustan Unilever (HUL) was able to grow underlying volumes by 4% y-o-y, although this was partially aided by re-stocking. Gross margins at the FMCG major contracted but Ebitda margins expanded thanks to lower employee expenses and smaller ad spends. 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 expect demand should bounce back in the next few months with the effects of demonetisation wearing off. 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.