Top-line growth skewed due to elevated prices of metals, crude and other commodity products
With the earnings season coming to an end, it is clear India Inc is making a recovery with the consumer pack leading the way. Results for Q4FY18 come off a favourable base — Q4FY17 was the first full quarter post-demonetisation — and have been just about in keeping with expectations.
The aggregate numbers —top-line growth in particular — are skewed by the presence of several heavyweight commodity players; elevated prices of metals, crude oil and other commodities have driven up revenues. However, for users the higher input costs have pressured margins.
Nonetheless better consumer spends have driven up sales of both durables and staples as reflected in the volumes for cars, two-wheelers and consumer staples. The pick-up in rural demand is visible.
The management at Hero MotoCorp, for instance, believes the demand outlook is encouraging and that the two-wheeler industry should report a volume increase of 9-10% in 2018-19.
Given inflationary pressures, management commentary suggests price hikes are imminent. Hindustan Unilever, for instance, reported a strong set of numbers with the volumes up 11% y-o-y. Management commentary, analysts say, sounded a shade less optimistic than was expected, possibly because of rising crude oil prices. At Tata Motors, for instance, the management attributed the miss in standalone operating margins partly to commodity cost increases.
For a sample of 942 companies (excluding banks and financials), revenues have risen 15% not overly impressive in these inflationary times. With the increase in expenditure outpacing that in the top line, operating profit margins have contracted slightly. If Tata Steel and Vedanta are excluded from the sample, the rise in net profits is 14.5% year-on-year, much smaller than the 22% in Q3FY18.
Among the bigger disappointments has been Tata Motors whose profits were down 66% year-on-year thanks to some impairments following changes in the accounting policy. Jaguar Land Rover, which is facing headwinds in its key markets such as the UK and Europe reported revenues that were up just 4% y-o-y.
The core sector is some time away from a full recovery. Players in the core sectors of the economy remain somewhat stressed. Adani Power posted a loss of Rs 650 crore which was higher than estimates despite adjusting for one-time income received due to a favourable regulatory order. The losses stemmed from commercial shutdowns at Mundra, which is unviable at inflated imported coal prices and also low availability of coal at Tiroda and Kawai. JSW Energy reported disappointing results for the quarter with net losses of Rs 62 crore on the back of a fall in revenues of 5% y-o-y; that was due to lower power generation and lower blended realisations, which fell 11% y-o-y.
Nevetheless, pricing power is returning to several players. Ashok Leyland’s average selling price during the March quarter was higher by around 12-13% year-on-year and indicates better demand for trucks on the back of a pick-up in construction and mining activity.
Realisations for Eicher Motors in the quarter were up 5.4% y-o-y thanks to a price hike in February. Given a big chunk of the sales of consumer-facing firms emanates from the rural markets, — 50% for motorcycles — it would suggest rural demand is on an uptick.
Siemens’s like-for-like order inflows dropped 4% in the quarter and analysts say the management does not see a pipeline of large projects. CEAT reported results below expectations due to a weaker mix as replacement volumes were slower with the company not able to take a price increase in the two-wheeler segment given increase in competitive intensity.
Meanwhile, in signs that reflect an uptick in demand, the decorative paints business at Asian Paints, for instance, reported double digit volume growth, after three quarters of single-digit growth. Arvind Limited reported a smart 16% y-o-y increase in revenues which drove up the operating profits. Volumes for Godrej Consumer’s branded products were up a reasonably good 7%; the management sounds confident it can deliver double digit volumes and better margins in 2018-19. Jeweller Titan beat the street’s estimates handsomely; revenues rose 12% y-o-y while the recurring profits surged 66% y-o-y, partly aided by hedging gains.
Jubilant Foodworks reaped the benefits of a clean-up of its operations by which it weeded out loss-making stores. The QSR reported a rise in same store revenues of 26.5% y-o-y — the highest in six years with the management focusing on driving value on daily basis. The operating profits at battery-maker Exide were up a strong 29% y-o-y in Q4FY18, on the back of an equally impressive 24% increase in revenues driven by double digit volumes in the auto segment. The company was able to take price hikes to pass on costs. Evidence of a pick-up in consumer demand comes also from lenders such as L&T Finance Holdings which reported a strong 28% y-o-y increase in loan growth. This was driven by strong rural business, up 64% y-o-y and a 100% plus increase in housing lending. Revenues at Nestle grew a healthy 11%; more important it demonstrated pricing power as gross margins expanded 462 basis points y-o-y.
Future Retail posted a lower than estimated results on the back of subdued same stores sales growth (SSSG) at 6% as lagging growth in EasyDay and ezone dragged the robust performance by Big Bazaar which posted a 11% SSSG growth, even on a higher base.
The pharma space continued to witness challenges mainly led by headwinds in the US. Dr Reddy’s posted a subdued set of results in Q4FY19 with consolidated revenues falling a per cent on a year-on-year basis.
Revenues from the global generics market witnessed a marginal decline led by lower contribution from North America generics markets due to higher price erosion and unfavourable US dollar conversion. Gross profit margin eroded by 190 bps for the full year even as the company on account of higher price erosions, increased competitive intensity in some of the key molecules in the US and adverse foreign exchange impact. The management has stated it will continue to work diligently on resolving pending regulatory issues and also focus on accelerating new products to market and improve the approval process.
Similarly, Cipla also posted a subdued set of results with revenues and margins dropping below estimates.