Earnings this season are clearly disappointing with a fair number of heavyweights missing estimates. Bharti Airtel failed to deliver both on the top line and ebitda while SAIL?s profits fell 23% before exceptionals and 55% if the m-t-m impact of short-term forex loans is considered. At Maruti Suzuki, profits crashed 60% y-o-y. For a sample of 754 companies (excluding banks, NBFCs and oil marketing companies), profits in the three months to September 2011, have actually fallen 21% y-o-y compared with a rise of 30% y-o-y in the June quarter. The problem hasn?t been as much in the top line, which was up a satisfactory 23%, some of it driven by inflation. The culprit, not surprisingly, has been the higher cost of raw materials?up 260 basis points as a share of sales?which has dented operating profit margins by 200 basis points.
Had demand in the home market been a tad more robust, companies may have been able to pass on the higher costs but the latest trends betray few signs of recovery; inventory at Ashok Leyland hasn?t come off meaningfully from June levels, and the fact that volumes are down 6% between April and October means that either fleet operators are sweating their assets or that a smaller quantum of goods is being ferried. With car companies not exactly doing brisk business, it?s no surprise then that demand for steel remains sluggish, and it?s because imports may not be affordable given higher iron ore prices that?s supporting domestic prices. L&T order inflows were down 21% y-o-y in the September quarter and the engineering major lowered its guidance for order inflows to just 5% for 2011-12 from 15% earlier, signalling that the capex cycle isn?t about to turn in a hurry.
It?s not just industrial growth that?s losing because same-store sales at Shoppers Stop were up a very tepid 11%, despite an early festive season. It?s true that not every retail space has been as badly hit; Hindustan Unilever?s personal products sales grew a good 18% y-o-y, with the firm demonstrating both brand and pricing power while both Bajaj Auto and Hero Motocorp have done brisk business. But bankers have been pointing out that individuals aren?t rushing to buy cars or homes, meaning there has been some moderation in demand for credit. That demand could moderate further if industrial growth doesn?t gather pace; the same bankers say that new projects aren?t taking off and that loans being disbursed right now are to ventures sanctioned many months ago. So, while banks have turned in decent numbers in the September quarter, with most of able to sustain margins, the rise in NPAs is cause for concern.