Q2 earnings: Margins pressured as input costs soar

By: | Published: October 22, 2018 5:56 AM

Revenues do well but not enough to offset the much faster increase in raw material costs.

infosys, it sector, it industryInfosys reported a good set of numbers with constant currency revenues rising 8% year-on-year and large deal wins at an all-time high. (Reuters)

The September quarter earnings season has got off to a disappointing start with many more misses than hits including those from Reliance Industries, UltraTech Cement and HeroMotocorp. While IT majors Infosys and TCS turned in fairly good numbers, some of the smaller players didn’t do as well. Hindustan Unilever reported a middling quarter.

Rising costs are pressuring the profitability at a host of companies. At cement major UltraTech, profits fell year-on-year in the three months to September as rising energy and logistics cost, coupled with rupee depreciation, drove up expenses by 14% y-o-y.

For a sample of 49 companies (excluding banks and financials) revenues have risen 38.1%; excluding RIL, revenues rose just under 20%. RIL accounts for 56% of the total revenues of the sample. Operating profit margins for the quarter fell 332 basis points y-o-y to 16.2%. That’s because of a sharp rise in costs; the ratio of raw materials to sales went up by as much as 457 basis points y-o-y. The profit after tax, for the sample increased just 3.6%, and excluding RIL, they were down 4.5% y-o-y.

To be sure the earnings at HUL were good; however the quality of the earnings growth at the FMCG major was not as good as expected since the pricing component was lower than it has been in the last six to seven quarters. Analysts believe there is some competitive pressure in the sector. Also, the company held back on ad spends which have typically gone up by about 20% in the previous four quarters.

Net profits at HeroMotoCorp were down 3.4% y-o-y. The two-wheeler manufacturer reported operating profits or Ebitda (earnings before interest cost depreciation and amortisation) that were lower by 5%
y-o-y following weak gross margins which were impacted by input cost pressures.

At ACC, consensus estimates was missed, the Ebitda per tonne fell 4% y-o-y with the company reporting lower-than-expected realisations. That has prompted analysts to trim their earnings estimates. At RIL, the gross refining margins during Q2FY19 came in below estimates, though the petrochemicals segment did well. At Havells, the Ebitda came in below estimates due to a fall in the margins in the cable segment. The company, however, posted a strong increase in revenues of 23%.

Infosys reported a good set of numbers with constant currency revenues rising 8% year-on-year and large deal wins at an all-time high. The company missed margin estimates as the costs were higher due to attrition. However, Mindtree did only modestly in a seasonally strong quarter.

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