It?s not a pretty picture. Earnings season so far has brought more disappointments than surprises and the results announced suggest a much slower growth in corporate earnings for the three months to June, 2011. After Reliance Industries turned in results that were in line with the Street?s expectations, Ashok Leyland reported a steep 30% fall in profits on the back of falling sales volumes while Sesa Goa?s profits slumped 37% y-o-y. Crompton Greaves profits crashed 58% y-o-y driven by the poor show at its international subsidiaries. Indeed, what?s of serious concern is the tepid performance of the capital goods space where order inflows aren?t really picking up. Heavyweight Bhel, for instance, did not win a single meaningful order from the power sector in the June quarter and, as a result, saw order inflows fall 77% y-o-y. Orders at Thermax dropped 19% y-o-y despite the firm winning two big orders.
Consumption, on the other hand, appears to be holding up fairly well in a tough economic environment of raging inflation with FMCG majors like Hindustan Unilever and ITC managing to push through volumes. In fact Maruti Suzuki?s profits came in ahead of expectation driven by a better sales mix and a higher average sales price. Asian Paints was able to report a strong 23.5% growth in its top line. It?s also interesting that volumes of gold jewellery at Titan jumped 35% y-o-y pushing up sales by an incredible 72%. However, Bajaj Auto?s profits came in below expectations driven by weaker than expected realisations with a shift in the product mix towards lower-priced models.
For a clutch of 668 companies (excluding banks and financials) the top line, not surprisingly, has grown at a strong 26% y-o-y in the three months to June 2011. That?s more or less in keeping with the trend seen in the March 2011 quarter and partly due to high inflation.
However, high raw material costs ? up nearly 350 basis points as a share of sales?have dented operating profit margins (opm) which have dropped, 215 basis points y-o-y, for the sample. As such operating profits have risen just 12% y-o-y whereas, in the three months to March, they had risen a much smarter 20% y-o-y. The bottom line: net profits have grown at a very slow 13% y-o-y in the June quarter compared with a strong 24% y-o-y in the March 2011 quarter.
Indeed, margin pressures are visible across the board. Gross margins at HUL came off by a steep 500 basis points y-o-y, while the operating margins at Dr.Reddy?s fell 65 basis points y-o-y and the bottom line was boosted by a lower tax rate. Bajaj Auto margins fell 90 basis points y-o-y. The power sector seems to be in a bit of a spot; JSW Energy reported a 54% drop in profits below consensus estimates. ?The results underscore fuel costing, weak state utility finances and merchant pricing risks,? JP Morgan observed in a report. Power generation at NTPC fell marginally y-o-y. ?This is possibly due to SEBs backing down from buying contracted power,? Enam Securities wrote in a note.
Jindal Steel and Power too reported weak numbers with the power division?s realisations coming in lower than estimated. That the economy is slowing down is evident. Vehicle inventories at Ashok Leyland increased to 10,000 units in the last quarter while at Exide profits were flat y-o-y partly due to lower demand for batteries for inverters and its inability to grow share in the auto replacement market. The Thermax management attributed the slowing order inflows to intense competition, challenging macro environment resulting in the finalisation of orders being deferred. In fact, the management of ICICI Bank pointed out that there was resistance from retail borrowers to rising interest rates. The country?s largest private sector bank now says it will grow its loan book by just about 18% this year, a tad lower than it had hoped. However, there are some bright spots. For instance, cement major ACC?s volumes jumped a sharp 13% y-o-y and the company together with other players benefitted from the uptrend in prices over the last six months.