Q3 earnings: Sales strong, but margins hit by low pricing power

Maruti Suzuki’s poor performance in the three months to December 2018 reflects the pain in India Inc. Consumer demand appears to be faltering as products become pricier. At UltraTech Cement, for instance, higher costs and weak realisations resulted in lower-than-anticipated numbers.

While Larsen & Toubro delivered a splendid set of numbers on the back of some strong project execution, the fall in order inflows was a slight disappointment. ITC’s numbers were a shade below expectations while InterGlobe Aviation’s profits crashed. However, Asian Paints did well to cash in on the festive season as did TVS Motors. Most managements have alerted the Street to the impact of elevated raw material costs and how it is not easy to pass these on to consumers. The management at United Spirits, too, was tempered in its outlook for the coming months.

In sum, while revenues have risen reasonably well, so have costs and competition; consequently, margins are under pressure. Hindustan Unilever (HUL) reported strong volumes, up 10% y-o-y, and net operating revenues, which rose 11% y-o-y. However, the domestic business grew at a somewhat subdued 13% y-o-y, possibly due to the less-than-expected pricing power. If HUL managed to post good ebitda margins despite keen competition it was by reining in costs — employee costs declined 5% y-o-y while ad spends were down 50 bps as a share of revenues.

At TCS, revenues were strong but margins were weak, contracting 90 basis points quarter-on-quarter. Analysts believe growth at India’s biggest software services player will slow down in 2019-20 given the signs of a macro-slowdown in the US. Infosys, too, reported a very smart top line growth; revenues in constant currency rose 10.1% y-o-y.

However, the IT major’s ebit margins fell 110 bps q-o-q due to a higher on-site mix and a lower utilisation rate.

Costs and competition hit Avenue Supermarkets where ebitda margins slipped 200 basis points y-o-y, even though revenues were up 33% y-o-y. The retailer reported net profits that missed analysts’ estimates.