Consumer demand dull, no upturn in capex cycle yet
Midway through the June quarter earnings season it’s clear India Inc’s recovery remains fragile; demand for consumer products remains dull as it does for capital goods. While the services sector is doing reasonably well it too has its share of challenges. Bharti Airtel, for instance, reported a strong set of numbers with operating profits for the local wireless business rising a smart 20% year-on-year, ahead of expectations. However, the growth in the data piece decelerated.
Anticipating some headwinds — globally and locally — analysts have downgraded estimates for nearly two dozen heavyweights including Infosys and Wipro. The bad news is that the capex cycle doesn’t seem to be turning: at Larsen& Toubro, orders inflows from the infrastructure segment were negligible indicating companies are not adding to capacity immediately.
However, commentary from the engineering major was cautiously optimistic. R Shankar Raman, CFO, L&T, said the order pipeline was looking fairly good. “We are staying with our order inflow guidance for the year of 15% and see no reason to reverse it just yet, ‘ Shankar Raman observed after the results were announced last Friday indicating the order book, at the end of March, 2017, should show a double-digit growth.
While most companies have switched to Ind-AS accounting norms and adjusted previous numbers to ensure exact comparisons, the new norms have resulted in some changes. In the case of JSW Steel, analysts point out, the net debt increased by `6,900 crore sequentially to `45,400 crore due to the Ind-AS impact.
HUL reported weak earnings with volumes growing just 4% year-on-year, a reflection of further deterioration in demand and decelerating market growth in the hinterland. Domestic consumer revenues grew at around 3.6%, suggesting modest price deflation for the portfolio. Adjusting for AS4, analysts believe revenues may have grown even slower at 2.9%. Dabur’s revenues were flat year-on-year with the local business growing just 0.5% y-o-y helped by a 4.1% increase in volumes, lower than the Street’s estimates. Nevertheless, with raw material and advertising costs reined in, ebitda margins expanded 130 basis points.
Pricing power is yet to return to most consumer firms. At Asian Paints, revenues grew 9% y-o-y and although volumes for domestic decoratives are estimated to have increased a strong 12% y-o-y, the price cuts taken by the company in March appear to have hurt realisations. However, at firms such as Bajaj auto, better product mix has help boost the average selling price thereby helping offset a drop in volumes.
A weak export performance resulted in revenues for the motorcycle maker rising just 2.7% y-o-y in the three months to June as total volumes came off by 2% y-o-y.
That the economy remains somewhat sluggish is evident from the performance of players in the core sector. Ultratech missed ebitda estimates, which came in at Rs 1,370 crore, up 26% y-o-y, thanks to lower than expected volume growth of 6% y-o-y. Reported revenues at Rs 6,180 crore were up just 2% y-o-y. Hindustan Zinc’s ebitda fell 38% y-o-y due to smaller amounts of metals mined, down 45% y-o-y, due to higher waste mining. ABB many not be the benchmark for the capital good space but the subdued profitability is nevertheless cause for concern. Order inflow growth—up 8%— remained subdued in the quarter and the backlog at Rs 7800 crore. The management ‘s outlook for industrial capex remained somewhat gloomy prompting analysts to trim earnings estimates by about 6% for FY17.
Analysts believe that although companies such as Ashok Leyland have done well during the quarter—revenues rose10% y-o-y led by a 15.5% increase domestic volumes—the momentum in the sales of trucks, which have shown an uptick over the past six to eight months, may not sustain. The growth in volumes in June actually slowed to 1.9% and industry watchers don’t see any sharp uptrend soon. Ashok Leyland reported excellent numbers with profits growing 101% to Rs 291 crore, year-on-year, due to a gain of around Rs 50 crore on currency movements a result of the migration to Ind-AS and lower interest costs.
The IT space seems to be in a spot — Infosys dropped the revenue guidance for FY17 —and with high frequency data not substantiating a strong recovery, earnings estimates for the year could be downgraded.
TCS reported a revenue growth, in constant currency terms, of 3.1%, lower than estimates, partly because the key BFSI vertical posted a growth of 1.7%. JSW Energy started off the year on a dull note with plant utilisation lower and realisations coming in at sub-optimal levels because the power producer set aside large capacities at Vijayanagar for the impending sales contract with Karnataka. The company reported a 32% y-o-y growth in consolidated profits at Rs 360 crore driven by contribution from acquired hydro projects that posted profits for Rs 77 crore in the quarter.