With close to 500 companies reporting losses, the highest number in at least five quarters, the earnings season has been a big disappointment. Save for a clutch of metals producers, which swung from loss to profit, most companies have struggled to grow their top lines in a weak economy. In an environment in which raw material prices have risen, albeit moderately, cash flows have been crimped. For a sample of 1,893 companies (excluding banks, financials, OMCs, metal producers and Reliance Industries), net profits fell nearly 15% y-o-y in the three months to March with revenues rising at sub-5% y-o-y.
Consumer spends are on a leash; Jubilant Foodworks and Shoppers Stop reported poor same store sales while at Britannia revenues grew just 6% y-o-y. Telcom firms’ bottom lines have been battered in a tariff war; profits at Bharti Airtel crashed.
In a quarter in which the impact of demonetisation was severe, volumes were hard to come by and pricing power nearly absent. At ACC operating margins contracted by 190 basis points due to costlier power, fuel and freight while at Hero MotoCorp, operating margins were dented by higher input costs. Capital goods makers such as BHEL reported subdued order flows and its revenues fell 3% y-o-y in Q4FY17. At Coal India, realisations were weak even as costs rose.
As strategists at Kotak Institutional Equities, noted, the 4QFY17 numbers look strong on paper but if the numbers have beaten estimates it is thanks to the strong performance of the overseas operations of Tata Motors, large adventitious gains for BPCL and IOCL and the high other income reported by ONGC.” Underlying drivers for most sectors continue to be weak, which has led to further earnings downgrades, “they wrote.
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While, commentary has been fairly cautious with some corporate chiefs apprehensive about the rollout of the GST on July 1, there are those who believe a lower incidence of tax and consequently lower prices of goods could boost demand. Moreover, prospects of a good monsoon should buoy rural incomes and spur sales of a host of staples and consumer durables. However, analysts believe sectors such as IT, pharmaceuticals and telecom will continue to face pricing pressures. The guidance from IT firms, facing several global headwinds, has been muted. Most drug manufacturers have seen revenues fall in Q4FY17; at Sun Pharma revenues fell 6.5% y-o-y with the US business facing pricing pressures while at Dr Reddy’s they fell by close to 5% y-o-y. the real estate and construction sectors continue to see lackluster activity; at DLF pres-sales dropped 65% y-o-y during the March quarter and operating cash flows remained weak leading to an increase in net debt.