Disappointments have outnumbered surprises by a wide margin in the June quarter earnings season with most heavyweights reporting numbers below the already-tempered Street estimates.
Among the bigger disappointments have been those of firms like Tata Motors; the automaker’s consolidated ebitda (earnings before interest, tax, depreciation and amortisation) fell a steep 45% year-on-year. The state-owned BHEL reported an ebitda loss on the back of weak revenues and higher provisions. Sun Pharma’s revenues fell a steep 25% y-o-y and gross margins contracted 400 basis points y-o-y, while losses at SAIL widened. At Adani Power, adjusted ebitda came off 24% y-o-y thanks to a big jump in both fuel and non-fuel expenses.
To be sure, pre-GST destocking had an impact on most manufacturers of consumer goods and durables — the contraction in factory output in June reflected this.
However, rising raw material costs have also pressured margins with the contraction accentuated by the muted growth in sales. Without the turnaround in metals companies, many of whom like Tata steel swung from a loss to a profit or posted a smaller loss like SAIL, the aggregate performance is less than ordinary. Several companies have reported losses. Profits for a sample of 869 companies (excluding banks, metals and OMCs) are up just 0.66% year-on-year with operating profit margins down nearly 140 basis points.
Vedanta’s ebitda, 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. JSPL’s numbers were below estimates with steel volumes muted at 4% y-o-y.
Order inflows at engineering companies don’t suggest any big uptick in investments by the private sector. The management at Thermax, where revenues fell 11% y-o-y, observed it would continue to be a buyers’ market for another one and a half to two years. Order inflows at Larsen & Toubro de-grew in Q1FY18 at 26,400 crore, albeit due to a chunky win in the base quarter, but orders from the home market were up by about 12% y-o-y. R Shankar Raman, Group CFO, L&T, said capex spends continue to be largely led by the government.
Britannia’s core volumes are estimated to have grown by about 2-3% yoy – which was reasonably good given the GST-destocking. A one-time compensation to dealers for GST hurt M&M’s performance, pulling down ebitda margins by about 100 basis points y-o-y; net sales up 5.4% y-o-y, ebitda down 2.3% y-o-y, and adjusted PAT down 2.9% y-o-y
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, has seen 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. At Nestle, too the 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.
Smaller cement players such as Dalmia Bharat reported a reasonably good volume increase of 6% y-o-y and better realisations helped push up revenues by 16% y-o-y. Most others, however, including Tata Chemicals, have reported very poor results.