With the Q2FY18 earnings season now in its last phase, it would appear corporate India has probably recovered from the shock of demonetisation, but is still grappling with the GST. The reasonably good rise in net sales for a clutch of around 500 companies (excluding banks and financials) of around 11% y-o-y is more the result of the rise in prices of commodities such as steel rather than any big jump in volumes or realisations in sectors other than these; profits grew 8.3%. Indeed, that engineering firms such as BHEL reported a 5% drop in revenues and that order flows during the quarter were down 10% y-o-y, reflects the sluggishness in a core sector of the economy. Nonetheless, the turn in the commodity cycle has helped producers of metals—revenues at Hindalco, for instance, rose 14% y-o-y and by 36% at Vedanta. However, this has driven up costs for businesses that use these products. The higher expenditure in raw materials, coupled with the modest increase in net sales, left no room for operating margins to expand.
Those firms that have managed to report better margins have, more often than not, done so by reining in expenses. Hero MotoCorp, for instance, reported a 6.3% y-o-y increase in ebitda, largely led by a reduction in other expenses. Clearly, demand remains subdued and companies are not able to pass on the higher costs to consumers. Also, volumes increase across sectors have been modest despite the early arrival of the festive season and the re-stocking post the rollout of the GST on July 1. While the FMCG firms reported reasonably good volumes, some part of this was the result of restocking. Hindustan Unilever, for instance, volumes increased 4% y-o-y, but off a weak base, in Q2FY17, when the growth was negative. This has prompted analysts to conclude demand isn’t picking up as fast as one would like. However, management commentary has been positive; most companies said the disruption caused in the supply-chain and wholesale channels is reversing, albeit slowly.
The good news is that demand in the rural markets seems to be picking up, as seen from the performance of HeroMotocorp and Maruti Suzuki’s whose rural sales jumped 22% y-o-y during the quarter. Businesses competing in overseas markets, such as IT, continue to be under some pressure; both Infosys and Wipro pruned guidance. Back home, too, the competitive intensity in sectors such as telecom has hurt the companies like Bharti Airtel whose profits in Q2FY18 fell a sharp 70% y-o-y. Even small companies such as Exide are feeling the impact of competition at a time when demand is subdued. Until the capex cycle turns up, it is hard to see demand improving on a sustainable basis. But there are few signs of any increase in demand for capital goods so far; Thermax, for instance, reported a 27% drop in consolidated net profit as revenues fell by about 6%.
Indeed, while there are pockets of promise, there are enough indications that recovery could be a while away. For instance, traffic across some key expressways remains slow. This could, of course, be the impact of GST, and it is possible traffic will pick up once businesses adjust to the new tax regime. Indeed, a clearer picture of how the corporate sector is faring should emerge six months down the line.