Lower input costs support operating profit margins
There have probably been more disappointments than surprises in the September results season so far but India Inc’s performance needs to be viewed against the backdrop of the slow pace of investments, weak rural demand and falling exports. Given the challenging environment, which has prompted economists to lower their growth forecasts — Bank of America Merrill Lynch has pruned its GDP growth projection to 7.4% in FY16 very close to FY15’s 7.3% — firms like Hindustan Unilever have done fairly well even though the headline numbers may have missed analysts’ estimates.
Reliance Industries (RIL) and Infosys turned in strong numbers, the former reporting the best refining margins in six years. However, Tata Consultancy Services disappointed the Street although the management commentary didn’t come across as being over-cautious; in fact, it was Infosys’ commentary that was a tad soft as it lowered the FY16 guidance for dollar revenues.
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For a sample of 45 companies (excluding banks and financials), net sales fell close to 20% y-o-y reflecting primarily the slide in the crude oil prices. With the total expenditure contracting by a huge 24% — the consequence of softer prices of commodities — operating profit margins rose 500 basis points.
A smaller interest bill and a subdued increase in depreciation helped push up net profits by 12%.
HUL’s performance points to continuing weak demand in rural markets; the FMCG major has been compelled to take price cuts and spend more on promotions to protect its market share though the underlying volume was a fairly healthy 6.5%. Again, LIC Housing Finance’s weak disbursements — up just 13% y-o-y in Q2Fy16 compared with 20% in FY15 —are an indication that the urban demand too isn’t all that robust either. Evidence of this can also be seen in that real estate player Sobha’s sales performance for the September quarter was a subdued one with the company able to sell just 0.85 million sq ft almost flat year-on-year despite Bengaluru being a big market. Nevertheless, there are pockets of growth — Zee Entertainment, for instance, reported strong advertising revenues, up an enviable 35% y-o-y.
While it is the consumption demand that’s widely expected to lead the recovery—via lower interest rates, savings on fuel, salary hike of central government employees following the recommendations of the 7th Pay Commission, for the moment it doesn’t seem like consumer confidence is high. Auto manufacturers are resorting to steep discounts to push inventories; even models that are not so dated are available cheaper.
Sales of two wheelers remain under pressure especially for players like Hero which tap the rural catchment. The stress in the hinterland has been exacerbated by a sharp drop in the growth of rural wages in recent months, although the government is attempting to boost incomes by extending the MNREGA scheme to 150 from 100 days in drought-affected parts of the country. Nevertheless, the increase in real rural wages is virtually flat. It’s not surprising then that expectations remain tempered — net profits for the Sensex set of companies are expected to fall by about 3% year-on-year in Q2FY16.