It’s been a season of many misses and very few hits. Weak demand and keen competition have left companies with limited pricing power while higher raw material prices have driven up costs. It’s not just smaller businesses that are finding it hard to pass on the higher costs, which are both commodity-driven and regulation driven. Heavyweights too have not been able protect their margins; from BHEL to HeroMotoCorp and Bharti Airtel, it has been a string of disappointments.
The stress can be seen in the balance sheets. An analysis of 1,803 companies (excluding banks and finance companies), by CARE Ratings, showed the interest cover — or the ratio of PBDIT to interest — had slipped to six times in Q3FY19 from 6.6 times in Q3FY18.
The pain has been particularly severe in sectors such as telecom. While Vodafone Idea reported a massive consolidated net loss of Rs 5,005 crore, Bharti Airtel just about managed to stay in the black with a small profit of Rs 86 crore, on the back of an exceptional gain of Rs 1,017 crore. Rivals Bajaj Auto and Hero MotoCorp have been compelled to get into a price war to protect market share. In Q3FY19, Hero MotoCorp’s gross margins slipped 140 basis points y-o-y due to higher commodity prices and a weaker product mix; the Ebitda margin fell 190 basis points y-o-y. Again, gross margins at Mahindra & Mahindra (M&M) fell 160 basis points y-o-y due to raw material cost pressures even as inventories remained high. At Nestle, Ebitda margins contracted 360 bps y-o-y owing to a jump in other expenses, largely on promotions. At Avenue Supermarkets, Ebitda margins slipped 200 bps y-o-y again due to competitive intensity and higher costs.
The retailer has resorted to price cuts to drive volumes.
Larsen & Toubro delivered a splendid set of numbers, posting a 24% increase in revenues and a 27% increase in ebitda on the back of some strong project execution. While the fall in order inflows was a slight disappointment, the backlog is healthy. Order inflows at BHEL were down 36% y-o-y in Q3FY19 and given the weak trend in orders, analysts have been compelled to trim revenue estimates for 2019-20 by 8-9%.
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The shortage of liquidity since September appears to have pushed up the cost of finance hurting the demand for consumer durables while subdued investments in projects by the private sector and sluggish construction have left the demand for materials such as cement weak. Industry leaders like Hindustan Unilever have managed to post good ebitda margins despite keen competition it has been achieved by reining in costs — employee costs declined 5% y-o-y while ad spends were down 50 bps as a share of revenues. IT services firms have done reasonably well; at TCS, the growth in constant currency revenues was 12.1% y-o-y, though margins were weak. However, given the global slowdown, Indian IT companies face several headwinds. The surplus capacity in the cement industry has seen manufacturers unable to raise prices beyond a point. Realisations of players like UltraTech are unable to cover for the rising costs.