India Inc’s Q1 earnings don’t reflect strong recovery despite help from weak base

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Mumbai | August 6, 2018 5:06 AM

Heightened competition across sectors is robbing companies of pricing power.

While revenues were strong, adjusting for one-offs leaves the firm with a 26% y-o-y rise in reported net profits which is a shade below estimates.

A favourable base was always expected to boost corporate India’s June quarter earnings; Q1FY18 was the pre-GST quarter which saw companies staying light on stocks. However, beyond the bump from the weak base, the Q1FY19 results don’t reflect any strong recovery; neither the increase in sales nor the rise in profits is anything to write home about. On the contrary, heightened competition across sectors — from telecom to two-wheelers — is robbing companies of pricing power and they are struggling to pass on the increased costs of raw materials.

For a sample of 585 companies (excluding banks and financials), net sales have risen a strong 21.5% year-on-year; a slower increase in expenditure resulted in the operating profit margin for the sample expanding by about 44 basis points y-o-y driving up the operating profit by 24%. The increase in the ratio of raw materials to sales by 143 basis points is in line with that in the previous three quarters.

Not surprisingly, management commentary is cautious and while there haven’t been any big downgrades to earnings forecasts just yet, there are no upgrades either.

The loss reported by Tata Motors was unexpected even if it was the result of some one-time factors. Reliance Industries turned in a reasonably good performance though the Street was disappointed with both the petrochemicals and refining margins. While consumer-centric companies — both staples and durables — did well to report strong volume growth — on a low base —, analysts believe there isn’t too much pricing power expects with the market leaders.

Maruti Suzuki’s smart jump in revenues of 28% y-o-y was the result of a richer product mix and not just better volumes. Asian Paints did well, partly helped by the low base with standalone volumes estimated to have jumped 13-14% y-o-y in Q1FY19. Businesses in the core sector have done reasonably well though surplus capacity in sectors such as cement are keeping prices in check. Larsen& Toubro’s margin expansion of 200 basis points y-o-y, as analysts have pointed out, must be viewed in the context of the low base and also some other factors; in fact, margins for the key infrastructure segment fell 30 bps y-o-y in spite of better executions.

While revenues were strong, adjusting for one-offs leaves the firm with a 26% y-o-y rise in reported net profits which is a shade below estimates. The good news is that order inflows jumped 37% y-o-y during the quarter though the order backlog at the end of June was higher by just 3%. And the ordering will continue to be dominated by the government sector because private companies aren’t spending too much on capex just yet. BHEL’s Q1FY19 revenues were up just 8% y-o-y and below estimates since execution in the power segment wasn’t as good as expected; while the reported Ebitda jumped 42% y-o-y, the entire beat was thanks to a lower-than-expected other expenses. Else, a bigger raw materials bill and employee costs should have crimped margins. So while headline numbers look good — and in some instances have been propped by asset sales — a closer look reveals several pressure points; less-than-exciting consumer demand, huge competitive intensity both of which are robbing companies of pricing power as they gather volumes.

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