Financial results for the three months to June make it abundantly clear corporate India is some time away from a full-fledged recovery. The anaemic increase in the net sales of just 1.5% y-o-y for a clutch of 2,555 companies is discomforting, given the environment is no longer disinflationary. Demand appears to be weak across the spectrum of goods and services, making it difficult for companies to push through volumes and restraining them from raising prices. Much in line with the trend exhibited by the factory output data, which barely grew between April and June, capital-goods-makers turned in a very ordinary show, with the order book at engineering firm BHEL down 7% y-o-y at
Rs 1.1 lakh crore. At Larsen & Toubro, orders inflows from the infrastructure segment were negligible. Steelmaker SAIL’s volumes rose just 3.5% y-o-y, ostensibly at the cost of lower realisations, down 6% y-o-y. Moreover, while Ultratech’s volumes grew by 6% y-o-y, the topline rose just 2%. Even large players such as Mahindra & Mahindra face competitive pressure which is hurting realisations and operating margins.
It is possible consumption will pick up in the festive season, partly driven by the hefty hikes in salaries of government employees. In the June quarter, though, spends were on a leash for both large- and small-ticket items. At Godrej Properties, for example, sales, at Rs 386 crore in Q1FY17, crawled to the lowest levels in the past three years. Jubilant FoodWorks’ reported negative same-store sales growth, and at Hindustan Unilever, volumes grew at just 4% y-o-y. The bad news is that employee expenses during the quarter remained virtually flat, not auguring well for consumption.
Worryingly, a host of companies remain highly leveraged; JSPL’s consolidated ebitda, for instance, was only marginally higher than its interest costs. Firms such as Adani Power remain highly leveraged; the power producer’s debt is currently Rs 52,000 crore. In the case of JSW Steel, analysts point out, the net debt increased by R6,900 crore sequentially to Rs 45,400 crore due to the impact of the new accounting standards. While companies such as Ashok Leyland did well in Q1FY17, trends since then have not been encouraging. Sales of commercial vehicles—a proxy for the economy—showed a drop in August, of 10% y-o-y, the third consecutive month of weak volumes, with replacement demand moderating. While two-wheeler firms have reported strong volumes, these come off a weak base, as in the case of Hero MotoCorp, and constitute inventories at dealerships rather than retail sales. With the muted demand in the home market aggravating competitive pressures and the global recovery not picking up, analysts have trimmed earnings estimates for FY17 and FY18, albeit, marginally. The cuts have been relatively sharp for IT firms which are facing several headwinds. But a good monsoon notwithstanding, other sectors—telecom, for instance—could see earnings estimates being revised downwards before the year is out.