The subdued tone of the management commentary at Larsen & Toubro (L&T) suggests the recovery in India may have been pushed back by at least six to eight months. Chief Financial Officer R Shankar Raman said after the engineering firm announced results late last week he didn’t see the headwinds, that are holding back growth, subsiding anytime soon. L&T reported a dull set of numbers for the three months to December, 2016 with the top line staying flat and order inflows falling 10% y-o-y.
Indeed, demonetisation had an impact across most consumer-focussed companies — Hindustan Unilever for instance, saw volumes contract 4% in the quarter which resulted in flat revenues and lower operating profits.
However, some players didn’t do as badly as feared—Maruti Suzuki for instance reported a 12% y-o-y rise in revenues thanks to a 34% jump in sales to government employees. Nevertheless, gross margins for the car maker came in lower than estimates as it handed out more discounts.
Operating profit margins for a sample of 277 companies dropped by about 40 basis points as the increase in costs matched the rise in net sales. A big jump in other income boosted the bottom line by 9.5% y-o-y; shorn of this, net profits would have risen a meagre 2.25%. This was particularly true for Reliance Industries which reported weaker-than expected refining margins at $10.8 per barrel but posted a 33% jump in other income.
Top lines were clearly under pressure; at Asian Paints, net operating revenues rose just 2% y-o-y while at TVS Motors they went up 3% y-o-y with a marginal increase in realisations. The FMCG piece at ITC barely grew and margins for the firm dropped slightly to 26.1% for the three months to December although profits came in ahead of estimates. JSW Energy reported poor top line with a 29% y-o-y fall in revenues on the back of weak realisations, low capacity utilisation and a low share of merchant sales.
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Indeed, business does not seem to be too brisk in an economy hurt by an acute shortage of cash-net sales at cement maker Ultra Tech barely grew. Moreover,
intense competitive pressures hurt firms like Bharti Airtel whose India wireless operating profits fell 16% sequentially.
With prices of raw materials on the rise, companies are clearly feeling the pinch. The ratio of inputs to net sales, for the sample, increased 122 basis y-o-y points in Q3FY17. That compares with a rise of just 22 basis points in Q2FY17 and a fall of 544 basis points and 431 basis points in Q1FY16 and Q4FY16, respectively.