Pre-GST destocking and rising input costs have hurt profits in the absence of any strong topline growth
With a bigger share of hits than misses, the earnings season is turning out to be disappointing. A host of heavyweights, including TCS, Vedanta, Dr Reddy’s, Maruti and ONGC, have posted numbers below estimates with a few like ITC, Bharti Airtel and Reliance Industries turning out surprises. Among smaller companies, Nestle, Exide and Tata Coffee reported results below expectations.
Industry bellwether Larsen & Toubro (L&T) put up a reasonably good show. However, the order inflows do not suggest any meaningful pick-up in investments in the private sector. While order inflows de-grew in Q1FY18 at 26,400 crore, partly because of a chunky win in the base quarter, domestic orders grew by about 12% y-o-y. R Shankar Raman, group CFO, L&T, said capex spends were largely led by the government. “Some sectors in the economy are growing,” Shankar Raman observed. While pre-GST de-stocking was always going to be a bit of a dampener, the bigger concern that comes through in the numbers is that of rising input costs eating into margins.
The subdued volumes reported by makers of consumer goods are an indication that wholesalers and retailers are yet to adjust to the new tax regime. The management at Hindustan Unilever (HUL), for instance, said volumes were flat during the quarter with wholesale pipelines yet to be fully re-stocked. Maruti paid dealers a one-time compensation for the transition to GST and also higher discounts to clear dealer inventory which hurt margins; gross margins fell 40 basis points y-o-y. While a stronger economy may have helped offset the impact of the GST rollout, it is evident demand remains sluggish. Ashok Leyland, for example, saw its profit before tax crash 52% y-o-y as volumes remained weak. Bajaj Auto’s revenues slipped 5% y-o-y as volumes fell 10.7%; the lower channel inventory and a postponement of purchases by customers due to GST impacted wholesale numbers.
Net operating revenues at Asian Paints were up just 6% y-o-y with volumes growing at around 2-3%, partially the effect of pre-GST de-stocking. At Nestle, too, net sales rose 7% y-o-y, well below estimates, and again the result of retailers picking up less stock. Sales at Dr Reddy’s grew at just 2.5% with the management pointing out there had been an erosion in price realisations in the US market.
Meanwhile, rising raw material costs are eating into profits in the absence of a strong topline growth. Vedanta’s Ebitda (earnings before interest, tax, depreciation and amortisation), for instance, missed estimates by about 6% due to higher costs; consequently, analysts at Macquarie have trimmed their earnings forecasts for both FY18 and FY19. At Asian Paints, gross margins fell a steep 430 basis points driving down Ebitda margins by 530 basis points y-o-y; at ACC, both freight and fuel charges increased during the quarter. At Exide, lead price inflation hurt gross margins by 50 basis points in Q1FY18 and the trend will continue as lead prices have again moved up in July. Hero MotoCorp’s margins dropped 30 basis points y-o-y due to raw material pressures while at Bajaj Auto, they dropped a steeper 330 basis points y-o-y.