High costs, low pricing power trim corporate profits, margins in Q4

With the earnings season already half-way through, it is now clear that India Inc is in a bit of a spot. While a number of companies including Hindustan Unilever, Tata Consultancy Services (TCS) and Idea Cellular have turned in good performances, there has been a string of disappointments too. Maruti Suzuki?s bottom line was 3% lower year-on-year despite a big boost from other income, while Sterlite?s operating profit of R2,700 crore was a shade under estimates.

Not too many companies could improve volumes and even fewer could command pricing power. Indeed, subdued top line growth was not enough to cover costs and as a result, margins and bottom lines came under pressure. For a clutch of 1,066 companies (excluding banks and financials) net sales in the three months to March 2012, were up a reasonably good 15.5% y-o-y, though this was way below the 22% y-o-y seen in the December 2011 quarter. However, operating profit margins came off by 250 basis points leaving operating profit lower by 9% and consequently, net profits fell 4.7% y-o-y. This, despite the fact that other income rose 60% y-o-y and provided a big support to the bottom line.

High input costs continued to pressure margins. The ratio of raw materials to sales for the universe was 50.31%, up 87 basis points. This is probably the fifth quarter in a row that margins have come off. At Dabur, for instance, operating profit margins came in at 15.8% on the back of a 400-basis points increase in the ratio of raw materials to sales. Some firms like Hero Moto Corp were able to take price increases; at Shoppers Stop too, the top line benefitted from higher prices.

Management commentary has been mixed; while the team at Larsen & Toubro said it could grow revenues by 10-15% this year, tech major Infosys sounded far more cautious.

The order guidance miss by engineering major Larsen & Toubro (L&T) for 2011-12 is clear evidence of the state of things in Indian industry. Against a guidance of R80,000-84,000 crore, the company managed to bag orders worth just R70,574 crore. Few capital goods firms have been able to grow their order books. Siemens, for instance, reported rather dull order inflows of Rs 1,807 crore, down about 45% y-o-y and 36% q-o-q in the March quarter.

Not surprisingly, analysts are circumspect about the environment and consequently, the ability of companies to perform. For instance, while analysing Ashok Leyland, Kotak Institutional Equities noted that truck volumes are likely to remain under pressure due to a slowdown in industrial capex and consumer spending. ?Truck operators? profitability is under pressure due to the fall in freight rates and increase in costs,? the report added. While the management of JSW Steel has indicated that it would produce 8.5 million tonnes of steel this year, analysts believe the output would be lower given that sourcing iron ore could be a problem.