Expectations were always tempered but even the subdued earnings estimates, for the three months to December 2011, seem to have been a challenge for India Inc. The smaller companies were always expected to be under pressure, as is typical in an economic slowdown when they are bullied by customers, but the larger firms?Reliance Industries, Maruti?have turned out to be the
bigger disappointments.
At Ashok Leyland, net profits were off analysts? estimates by nearly 50%, with the Street unable to figure out why there had been such a sharp jump in other expenses. Nalco?s profits plunged 80%, while a forex loss at Adani Power saw it reporting a loss of R348 crore. Among the bright spots were Dr Reddy?s Laboratories, which surprised the Street both on the top line and the ebitda, and the cement clan, all of whom managed to reap
better realisations.
But, at the broader level, the picture isn?t pretty. For a clutch of 950-odd companies (excluding banks and financials) net sales are up around 23% y-o-y but, with expenses overshooting that, ebitda margins have wilted some 360 basis points y-o-y. With operating profits dropping off 3% y-o-y and interest costs up a sharp 40% y-o-y, it?s not surprising net profits have fallen 5%
y-o-y. At 365 basis points, the share of raw material to sales has seen the biggest jump in four quarters, a sign that inflation in commodities is yet to ease meaningfully. If the Hindustan Unilever stock sold off despite the
FMCG major turning in strong operating profit margins of 15.1%, up 270 basis points y-o-y, it?s because of the lower-than-expected top line growth in the personal products category, at 14% versus 16% in previous quarters. On balance, though, the consumption story is holding up reasonably well, propped up by robust rural incomes and the rise in real wages. Of course, volumes at Asian Paints may have tapered off to around 5% but that should be seen in the context of high inflation and the several price hikes that the company has taken. The consumption trend could slow down though; advance GDP estimates suggest private final consumption expenditure is going to grow at just 6.4% this year compared with an 8%-plus in 2010-11.
But the bigger worry continues to be the capital goods sector, where the unexciting performance tells us that the investment cycle may be far from turning. Order flows, although better at some companies, are by and large weak. At Thermax, consolidated order were sharply lower by 40% y-o-y in the December 2011 quarter and almost as much sequentially; that meant the consolidated order backlog was smaller by19% y-o-y. At Siemens, they fell 29% y-o-y. Larsen and Toubro (L&T) did better with inflows up a good 27% y-o-y after a 11% fall in orders in the six months to September. But net inflows at BHEL were a negative R1,900 crore because of the cancellation of an order; with this, orders for the nine months to December are down 60% y-o-y at R15,200 crore. While BHEL didn?t bag a single order from the power space in the December quarter, at L&T orders dipped to R10,400 in the nine months to December 2011, less than half of the previous year levels.
Clearly, the power sector is in big trouble, reeling as it is under the shortage of coal, a sharp jump in the price of imported coal and weak finances of SEBs. At Adani Power, average realisations fell sequentially. And, therefore, the engineering pack is not only likely to see relatively weak order flows, execution could be slower too. At Siemens, for instance, revenues dropped 6% y-o-y to R2,400 crore due in the December quarter, due to slower project execution pulling down margins by 900 basis points, to 5.2%, the lowest in 10 quarters. Cost overruns are also becoming an issue. The weak performance of the capital goods space is reflected in the rather muted estimates for gross fixed capital formation (GFCF) for 2011-12. GFCF is forecast to grow at just 5.6% to R17,95,081 crore in 2011-12, slower than the 7.5% seen last year.
While a few big companies are yet to report numbers, earnings downgrades aren?t done with yet. Earnings estimates for JSW Steel have been pruned by more than 10% for next year, given that volumes could suffer on account of the disruption in the supply of iron ore. Apart from performance-related issues, analysts are also taking cognisance of corporate India?s forex exposure. While the government may have taken a lenient view of how companies should report mark-to-market losses arising from currency fluctuations, analysts have chosen to be more prudent. So, the R500 crore of forex losses notched up by JSW Steel on buyers credit for coking coal imports have been treated as ?operational losses?, which means there was a standalone loss of R13 crore for the quarter. The resounding rally in the markets might suggest all is well; it?s true that sales trends for cement and automobiles in January have been encouraging as has the smart jump in the HSBC PMIs for both manufacturing and services. But until policies related to supplies of key resources such as coal or iron ore, or land acquisition, are sorted out and the government gets back to work,
corporate India is unlikely to start investing in fresh capacities. And, until that happens, the growth in earnings will be stifled.
shobhana.subramanian@expressindia.com