With both Infosys and Tata Consultancy Services (TCS) disappointing the Street, it’s been a subdued start to earnings season.
With both Infosys and Tata Consultancy Services (TCS) disappointing the Street, it’s been a subdued start to earnings season. The few bright spots — a sterling show from Hindustan Zinc which reported its best ever earnings in the fourth quarter of last fiscal — were overshadowed by several dull performances. Top lines, it would appear, are growing modestly and profits are being eked out by a strict control on costs and boosted by more other income. The deterioration in asset quality at some banks is a sign there are several pockets of weakness. The commentary remains tempered, especially from consumer goods players who worry about the sustained weakness in the rural and whole markets and the possible disruption during the transition to GST. Players in the IT space are understandably cautious at a time when the sector faces multiple headwinds.
Rajesh Gopinathan, CEO, TCS, believes the demand outlook is improving but the lowered dollar revenue guidance from Infosys to a band of 6.5-8.5% suggests it’s going to be another tough year. Although it’s early days yet, the infra space, it would seem, remains under pressure. At Reliance Infrastructure, revenues fell nearly 13% y-o-y dragged down by the steep 57% drop in the top lines of the EPC and contract businesses. If the firm managed a profit, it was thanks to a huge fall in costs —materials, contracting charges and other expenses. At Reliance Power revenues were flat y-o-y with analysts attributing this to weaker demand and consequently lower generation in Uttar Pradesh.
Again, profits were bumped up by lower costs and other income. In some instances, costs have risen denting profit margins. At ACC, for instance, revenues rose a good 8% y-o-y with volumes up nearly 4% y-o-y. However, operating margins contracted by over 190 bps due to higher power, fuel and freight and forwarding expenses. The consumer staples space is yet to recover from the impact of demonetisation. Despite spending large sums on promotions and investments in sales infrastructure, business was dull at Bajaj Corp. Although realisations were better thanks to a better mix of products and stable raw material prices helped push up gross margins by nearly 300 basis points y-o-y, poor volumes — down 7% — resulted in ebitda margins contracting 380 basis points y-o-y.
Analysts point out the salience of the wholesale channel is high for the FMCG sector and that post demonetisation, this channel suffered the most given the high use cash. “Our checks suggest that while urban markets recovered quickly, the rural markets are still under stress and might take another quarter to recover completely,” analysts at Jefferies wrote. Hindustan Zinc’s ebitda soared 187% y-o-y, driven up by a big jump in mined volumes resulting in higher refined metal output and concentrate sales.