The earnings season has so far been an extremely dull one, with most companies reporting muted top line growth and a fall in net profits. Demand is clearly very weak; companies have been unable to hold on to their operating margins and even pushing through volumes has been difficult.
With purchasing power being crimped, the competitive intensity has gone up. It’s worrying that the Hindustan Unilever management mentioned the R word in its posts results commentary. But the economy is slowing as seen in the factory output for March, which contracted, the first time in 23 months. The best news so far has been the fairly good growth in order inflows at Larsen & Toubro which increased 14% year-on-year in Q4FY19. But many of the other heavyweights — Bharti Airtel, Infosys, Maruti Suzuki and Hindustan Unilever — posted very ordinary numbers.
Indeed, the aggregate numbers don’t come as a surprise. Net profits for a sample of 334 companies (excluding banks and financials) are down 18% y-o-y on the back of a contraction in operating profit margins of nearly 300 basis points. Most managements appear to be in despair and hoping that government spends on infrastructure and work programmes will push up incomes.
The growth in the top line — a shade under 12% y-o-y – is half that in the previous three quarters. For most businesses, either volumes or realisations have been subdued. At TVS Motors, volumes rose just 2.1% y-o-y in Q4FY19, while HUL reported its lowest volume growth in six quarters at 7% y-o-y. Britannia posted a volume growth of just 7% y-o-y while volumes at CEAT declined by around 1% y-o-y due to decline in both the OEM and replacement segments. ACC’s volume growth of 5% y-o-y in the quarter was slower than the industry level growth of around 8-10%, analysts pointed out. At HeroMotocorp, volumes fell 11% y-o-y in a subdued industry demand environment and partly because of inventories needed to be cleared post the dull festive season. While Maruti Suzuki’s revenues grew at just 1.7 % y-o-y, at Hero they fell close to 8% y-o-y. At Shoppers Stop, same-store sales grew just 3.7% y-o-y despite a very weak base of a negative 4.1%.
At Bharti Airtel, revenues rose by just 4.8% y-o-y. Wherever possible, companies managed to grow revenues by earning better realisations. At Shoppers Stop, the average selling price rose 6% y-o-y while the ticket size rose 7% y-o-y. At Tata Steel, standalone volumes rose 18% y-o-y but realisations were lower by 8% y-o-y.
In the absence of a good top line, the profitability has been under pressure. EBITDA margins at HUL expanded 82 bps y-o-y, but this was the lowest y-o-y margin expansion reported in the past ten quarters. Also, this was led by flat staff costs and a lowly 3% increase in adspends. EBITDA margins at Bharti fell 310 basis points y-o-y while at TVS Motors for instance, EBITDA margins fell 30 basis points y-o-y.
At Asian Paints, margins contracted 230 basis points y-o-y. At Godrej Consumer, the management resorted to some aggressive cost rationalisation; staff costs, adspends and other expenses were down 2%, 13%, and 1% in absolute terms, respectively, helping margins stay more or less flay y-o-y. But despite that, the EBITDA fell. At Exide, margins rose 70 basis points y-o-y, but that was partly thanks to a fall in employee expenses which were down 4%.