While a favourable base has helped India Inc report a reasonably good set of results for the three months to June, much of the improvement in the numbers is also the result of companies containing costs. Better volumes have allowed companies to extract better operating leverage but keen competition is robbing them of pricing power and elevated raw material costs will continue to pressure margins. The turnaround in the metals space — especially steel — has boosted aggregate numbers. JSW Steel, for instance, reported a near 100% jump in operating profits on much better realisations. Hindalco’s ebitda (earnings before interest depreciation and tax) rose by about 18% y-o-y. These numbers, analysts say, are expected to moderate in the coming quarters.
For a sample of 1,054 companies (excluding banks and financials), net sales have jumped a smart 20% plus year-on-year. With total expenditure going up by a slower 19%, the operating profit margin has expanded by nearly 80 basis points y-o-y to push up the ebitda by 26%. With interest, depreciation and tax all rising only moderately, net profits for the sample too are up a good 26% y-o-y. Although raw material prices remain elevated, the bigger volumes—and in a few instances price hikes — have been partly able to absorb the increased costs. The ratio of raw materials rose just 97 basis points y-o-y, the smallest increase in at least four quarters.
While consumption demand is seeing a clear uptick with the effects of demonetisation and GST fading away, the investment cycle isn’t turning just as yet. While Larsen and Toubro’s (L&T) order inflows in Q1FY19 were up a strong 37% y-o-y, the order book at the end of June was up just 3%.
Analysts observed that Siemen’s backlog was depleted with not too many large orders coming in. With the private sector not yet in investment mode, other engineering companies too are in trouble. The Thermax management has indicated that there are currently no large orders from any sectors in sight.
FMCG companies have all reported strong volume increases — Q1FY18 was the pre-GST quarter during which companies stayed light on stock. Asian Paints did well with standalone volumes estimated to have jumped 13-14% y-o-y. It was a steady quarter from Hindustan Unilever — volumes were up about 12% but on a flattish base — and margins rose 100 basis points y-o-y after adjusting for GST; analysts believe the pick-up in demand is modest. Maruti Suzuki posted a strong set of numbers with revenues rising 28% y-o-y led by a strong volume growth and a richer product mix. Mahindra and Mahindra’s automotive segment volumes rose by 20% y-o-y while tractor volumes increased by 19% y-o-y in Q1FY19. Keen competition in the two-wheeler industry, however, saw Bajaj Auto and HeroMotoCorp report very modest numbers.
In the June quarter, both companies disappointed the Street; Bajaj Auto’s operating profits were below estimates thanks to a slight deterioration in product mix and bigger discounts aimed at growing market share which it did. But the strong 39% y-o-y rise in bike volumes wasn’t enough to offset the significantly lower ASPs in the home market. The tariff war has battered the bottom lines of telecom companies. Cement firms were able to push through volumes but realisations have increased only slightly given the abundant capacity. IT firms turned in a reasonably good show especially Tata Consultancy Services helped partly by the depreciation of the rupee.