Recovery in corporate earnings several quarters away

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Mumbai | Updated: August 10, 2015 10:42:30 AM

Volumes stagnant, pricing power stultified amid weak demand

Industrial outputThe weak order booking for industrial goods suggests a revival of the investment cycle is at least three-four quarters away. (Reuters)

With almost every heavyweight disappointing the Street, and smaller firms not doing much better, it’s clear the recovery in corporate earnings is several quarters away.

Tata Motors net profits crashed nearly 50% year-on-year, in the three months to June, reflecting the slow recovery in sales of commercial vehicles while BHEL’ profit’s plummeted close to 80% y-o-y even as the firm’s order book at the end of June stayed flat at Rs 1.16 lakh crore. Indeed, with companies not able to push through volumes and virtually no pricing power, earnings downgrades have been coming in thick and fast. The weak order booking for industrial goods suggests a revival of the investment cycle is at least three-four quarters away. As Crisil has pointed out that the capacity utilisation is at a five-year low across most sectors and more pertinently, the levels are well below the peak utilisation levels so there’s little incentive to add capacity.

Cement maker ACC’s margins tumbled to a decade-low with weak demand stifling pricing power. Ultratech, too, did badly with profits falling 6% y-o-y; moreover, the management commentary was none too encouraging either on prices or volumes, prompting downgrades of as much as 18% for FY16.


Indeed, while the lower cost of raw materials has no doubt benefitted users, weak consumption demand has left manufacturers bereft of pricing power.

The Hero Moto management for instance, has forecast a growth of just 3-4% for the two-wheeler sector for FY16, the most subdued outlooks in years. The reason is the slowdown in rural demand and some weakness in urban demand too.

Hindustan Unilever (HUL) should have done well given the gains from softer commodity prices—gross margins expanded 356 basis points y-o-y—but the FMCG major was compelled to pass on some of these to consumers in the form of power prices and some to the trade as higher promotions. At Asian Paints, volumes grew better than expected at an estimated 10% though it was lower–end products that sold more indicating consumer demand remains somewhat weak. Retailers like Shoppers Stop have been compelled to offer discounts to try and attract footfalls as a result of which profits have been under pressure; gross margins fell 160 basis points y-o-y.

Commodity players have of course been badly hit by the collapse in prices—whether of steel or crude oil. While JSW Steel did manage to report decent volumes, that came at a cost as steel realisations dropped 17% year-on-year resulting in a 12% fall in stand-alone revenues.

Tata Chemicals reported a fall in volumes and poor profitability for fertilisers. At GAIL, revenues dropped 6% y-o-y mainly on account of lower gas marketing revenues while profits dropped 32% y-o-y even though there was no subsidy burden on the company. The petrochemicals piece did badly turning in losses and analysts have pared earnings by 14-22%.Among the companies that fared well during the quarter were Idea cellular and Maruti Suzuki while Infosys surprised the street with a relatively strong 4.5% sequential revenue growth in the three months to June on the back of a 5.4% increase in volumes.

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