With the effects of demonetisation and the GST roll-out fading, the December 2017 quarter was expected to see corporate India recovering. While the comparison with the December 2016 quarter exaggerates the rebound, there has, no doubt, been a broad-based increase in volumes, driven by better demand. This was best seen in the consumer staples space—Hindustan Unilever posted a smart 11% y-o-y growth in volumes—and to a lesser extent in consumer discretionary segment. The headline numbers look reasonably good with net sales, for a sample of 2,592 companies (excluding banks, financials, OMCs), going up 10.6% y-o-y.
With the total expenditure going up by just 10.3% y-o-y, margins have expanded 20 basis points and net profits rose a smart 15.7%. A closer look at the data suggests the improvement in the top line for the universe has been pushed up by producers of commodities who have done well having earned better realisations. Also, not too many companies have managed to raise prices and any expansion in margins has come from reining in costs. Also, even if the impacts of GST and demonetisation have faded away, the environment isn’t easy and companies are grappling with some change or other, either globally or locally.
For instance, fierce competition in the telecom space has eroded the profits of incumbents; Bharti Airtel’s profits plunged 39%, missing the Street’s estimates as the tariff war continued. IT companies are yet to see any meaningful improvement in demand and consequently pricing; they’re also facing regulatory issues on HIB visas. In the home market, retail players’ results were very ordinary—at Shoppers Stop, like-to-like sales at department stores rose just 1.4% y-o-y. The good news came from the engineering sector with behemoth L&T turning in a very good set of numbers, primarily due to a good pick-up in orders —up 38% y-o-y—and also because the domestic infrastructure business did well, growing at 21% y-o-y. The L&T management indicated that the number of slow-moving projects had dropped to 13-14 from over 40 a year back. BHEL’s orders, too, saw a big jump in Q3FY18 albeit driven by one large order but nonetheless encouraging. At Siemens though, order inflows were flat yo-y.
On the whole, companies are struggling to regain pricing power; at Ultratech, for instance, prices were flat y- o-y and fell 5% quarter- on- quarter. Players such as HeroMotocorp are losing share in the motorcycle space to the competition.The shortage of raw materials continues to hurt—revenues at Adani Power fell by 11.4%, as the utility produced less power due to fuel shortages. Analysts are concerned, that margins could get crimped in the next few quarters, as raw material prices remain high. Apart from consumer staple companies, not too many others have the ability to pass on the increased costs. They believe companies will try to rein in other expenses on employees and promotions. While the current year could see only a single-digit rise in earnings, FY19 is expected to see a bigger increase of 15-16%, as the recovery gains momentum on the back of government spending on the rural economy. Moreover, the real estate sector is expected to see an improvement which, in turn, could catalyse other sectors.