The July-September earnings of India Inc continue to be disappointing with the net profit of a sample of 1,296 companies (excluding banks, financials and oil marketing companies) declining by 1.41% compared with the same period last year. A sharp rise in expenditure at 8.28% squeezed operating margins, which also declined 13.38 basis points. Weak order inflows saw domestic revenues of industrial and infrastructure companies decline sharply during the period, which reflects a slowdown in execution, which in turn reflects working capital challenges in the entire value chain due to disruption from the goods and services tax (GST) roll-out. Bellwether Larsen & Toubro (L&T) saw a tepid revenue growth while net profit lagged estimates. Even the order intake was lower than estimates due to continued deferment of major orders in the domestic market. The company had to revise sharply downwards its order intake guidance for FY18. Order inflow of other industrial and infrastructure firms like BHEL and ABB also declined on a year-on-year basis.
In the automobiles sector, volumes were strong across all segments with the passenger vehicle segment continuing to show strong volume growth on the back of festive demand and buying from government employees. The implementation of the Seventh Pay Commission recommendations by the central government and a few state governments resulted in strong demand for passenger vehicles from government employees and ex-employees; for example, government employees contributed 20% of Maruti Suzuki’s 2QFY18 sales. Two-wheeler volumes also rebounded after a weak first quarter, again partly aided by festive demand. Commercial vehicle volumes saw decent recovery with both Tata Motors and Ashok Leyland reporting 28% and 20% volume growth, respectively suggesting some recovery in the demand environment after the slump seen in first quarter.
In the cement sector, though volumes showed a decent increase with most companies reporting moderate to strong growth, profitability was under pressure with low realisations, which was not sufficient to offset a sharp increase in fuel and power costs. While consumer staples and discretionary companies reported healthy performance during the period with strong volumes growth, this was largely due to the restocking that took place in the aftermath of transition to GST from July 1.
Pharmaceutical companies continued to suffer during the quarter, especially in their US generics business. Cipla reported a 7% decline in US revenues although it reported strong performance in other geographies like South Africa at 14% growth year-on-year, India 12% and Europe 10%. Lupin’s US sales saw a 32% annualised decline led by continued price erosion, loss of exclusivity in combined oral contraceptive Minastrin and pressures in diabetes drugs Glumetza and Fortamet. Dr Reddy’s US sales were down 8% over the previous year, while Sun Pharma saw its Taro and non-Taro US sales decline 46% year-on-year due to strong price competition in its key dermatological portfolio.