It?s true that much of the damage to corporate bottom lines in the three months to September 2011 has been caused by the sharp depreciation of the rupee, which lost nearly 10% in a month. But it?s not just the debilitating effect of a weakening currency that has hit profits so hard; for a sample of 2,437 companies (excluding banks, NBFCs and oil marketing companies), net profits have actually crashed by some 50% y-o-y. In fact, it?s the first quarter in two years to see a fall in the profits of the Nifty 50. The adjusted net profits for the Sensex set of companies have risen 10.8% y-o-y but ex-energy they?re just flat.
Clearly, the harsh economic environment both at home and abroad has made life difficult for companies because operating and net profit margins are close to three-year lows. For one, prices of commodities haven?t softened enough?the sharp rise in raw material costs that are up 311 basis points y-o-y as a share of sales?is evidence of that. Expensive coal and bauxite have hurt Hindalco?s aluminium business with the stand-alone ebitda falling 7% y-o-y and 23% sequentially. Unfortunately, even if input prices start trending down soon, the impact on the raw material bills of corporates will be felt only with a lag since there is a fair amount of inventory. Again, at Tata Steel, for example, a fourth of the coking coal is sourced through annual contracts. That means margin pressures will remain; at Mahindra & Mahindra, for example, the management has indicated that it?s been somewhat hard to take price increases for tractors and, therefore, analysts are estimating lower ebitda margins of just over 13% for 2011-12. Earlier that number was 50 basis points higher.
At Tata Motors, where the stand-alone ebitda slipped 16.5% y-o-y, initiatives on dealer networks, marketing and promotions could drag down margins. It?s not just costs that are hurting margins; the growth in the top line, at just about 20% y-o-y, hasn?t been exciting, given that much of the increase has been due to inflation rather than a jump in volumes. For instance, Ashok Leyland hasn?t sold more CVs between April and September this year than it did in the same period last year and, in fact, in the September 2011 quarter, the company actually sold fewer numbers. At Tata Motors, volumes for passenger vehicles slipped 21% y-o-y.
The anaemic global recovery hasn?t helped; Hindalco?s subsidiary Novelis reported flat volumes y-o-y and a 4% sequential drop, not surprising given the weak demand environment in the US and Europe with the management saying it sees a pullback in demand from the infrastructure sector. Tata Steel says that volumes at its European operations could slip 8% sequentially in the December 2011 quarter, indicating that the situation on the ground is not improving.
Back home, the disruption in iron-ore supplies has forced JSW Steel to cut back production targets by 14% for 2011-12 to 7.5 million tonnes.
So, it?s going to be a combination of subdued sales and high costs that?s going to keep operating margins from expanding; in the September quarter they fell 400 basis points y-o-y. That, in itself, would not have been such a bad thing. What?s disheartening is that the capex cycle doesn?t seem to be turning. Larsen and Toubro?s order inflows were down 21% y-o-y, compelling the engineering major to tone down guidance for order inflows to just 5% for 2011-12 from the earlier15%. At BHEL, order inflows are down 31% y-o-y between April and September, again not the most encouraging sign. Smaller firms like Voltas saw a 28% y-o-y drop in the September quarter.
The cost overruns for projects like GVK Power?s 330 MW Alaknanda plant where it?s up 44% to R3,900 crore, and the Mumbai airport capex which has risen 25% to R12,300 crore is not good news at a time when interest rates remain high. In a perverse way, the fact that companies haven?t been spending on new ventures has meant that they haven?t piled up a whole lot of debt. There are the usual suspects; Jet Airways has loans of around R14,000 crore while analysts expect that Reliance Communications? net debt will be close R30,000 crore in March next year. Although Hindalco may have a net debt of R24,500 crore, the net debt-to-ebitda is estimated to fall to less than 3X by March, 2012, from above 3X last year, given the stable cash flows from operations. But the net debt at several infra and power companies has risen sharply; Adani Power?s net debt is up at R20,700 crore from R16,500 crore at the end of March, 2011. Again, GMR Infra?s consolidated borrowings have risen to R22,700 crore from R21,000 crore in March. The concern is if cash flows turn weak, smaller companies, in particular, could start delaying on dues to banks.
It?s not just industry that?s hurting, consumer spends, too, are slowing; same store sales at Shoppers Stop were up a very tepid 11%, despite an early festive season. In all this gloom though, banks have done fairly well this time around with loan growth exceeding 20% on average and most banks able to maintain margins but the big concern at PSU banks has been the increase in non-performing assets. In fact, had they set aside some more money as provisions, their profits might not have looked so good. The bottom line is that earnings estimates are being pared: Kotak Institutional Equities now forecasts that Sensex profits will grow at just 14.4% in 2011-12 compared with a 19% increase anticipated before the results season. At this point, even that seems a tad optimistic.
shobhana.subramanian@expressindia.com