Managements are cautious and don’t expect an upturn soon
Midway into earnings season, it’s clear India Inc’s P&L account remains under pressure. Revenue growth is so sluggish that even a modest increase in costs hasn’t helped companies protect their margins. However, the real bad news is that the turn in the private sector capex cycle is a good 12-18 months away and consumption demand, while it may perk up in the second half of the year, is unlikely to rise meaningfully.
Indeed, commentary is more than cautious, with no CEO talking of a sustained upturn in demand. Net profits for a sample of 252 companies have fallen some 14% year-on-year; remove TCS and Reliance Industries and they have crashed 28% y-o-y. Without these two firms, the revenue growth slows to just 3.2% y-o-y. Much of the
weakness in demand is due to a debilitated farm sector; the moped segment, for instance, has been partly hit due to rural distress and a delayed and deficient monsoon.
While the telecom sector has been badly bruised — Vodafone Idea reported a loss of `4,900 crore — profits at automobile companies have been dented. At Bajaj Auto, operating margins contracted 250 basis points y-o-y as the company spent heavily on marketing and the sales mix was somewhat adverse. Analysts believe margins could shrink further as companies might need to absorb costs and spend more on promotions. The commentary from the TVS management was subdued; the industry is expected to see a fall in volumes in 2019-20.
Maruti Suzuki reported an 18% y-o-y drop in volumes which pulled down Q1FY20 profits by nearly 28% y-o-y. Tata Motors reported a staggering loss of `3,679 crore; the management said margins for the domestic business would see a marginal correction, given the market uncertainties. Siam on Friday lowered the guidance for passenger vehicles from a growth of 3-5% to a de-growth of 2-3%; for CVs it trimmed the estimate from a10-12% increase to just 2-3%.
The Hindustan Unilever management sees no trigger for an immediate recovery and told analysts that the slowing momentum in the economy and some liquidity issues were hurting. The FMCG firm reported a 5% y-o-y rise in volumes — the slowest in seven quarters.
The Asian Paints management was somewhat unsure of performance in the next few quarters, given the weak macro environment, mixed monsoon trends and chances of a lacklustre festive season. The most worrying comments came from the Larsen & Toubro management which expects private sector capex to pick up only after 12-18 months.
The stress in rural India is evident from the results of lenders such as Mahindra & Mahindra Financial Services, which reported a sharp surge in bad loans. Analysts are concerned asset quality could deteriorate if the environment remains weak. In general, the growth in advances by lenders has slowed with demand for corporate loans staying muted and much of the growth in credit seen in the retail space