India Inc has put up a satisfactory show so far in the Q4FY18 earnings season with elevated commodity prices helping producers but hurting users. Most companies have reported numbers in line with expectations and while there have been no big disappointments there haven’t been any big surprises either. The results must be read in the context of a favourable base effect —Q4FY17 was the first full quarter post-demonetisation.
The auto and FMCG staples packs seem to be back on track after the disruptions from demonetisation and GST. Hindustan Unilever reported a strong set of numbers with the volumes up 11% y-o-y. However, the infrastructure sector could take a while to recover which is why neither the top line rise nor the earnings growth is much better than it was in the December 2017 quarter.
Management commentary, which should have been more optimistic, has been somewhat cautious with CEOs worried about rising crude oil prices and interest rates. The management at HUL, for instance, was cautious about inflation in raw materials.
At an aggregate level, the good performances from two metals majors — Tata Steel and Vedanta — have helped the numbers look better. If one was to exclude these two from the sample of 571 companies, the increase in net profits, for Q4FY18 would be just 12.6% year-on-year not very different from the 12.3% y-o-y growth seen in Q3FY18. Even if Tata Steel and Vedanta’s results are taken into account the operating margin for the sample are up just 16 basis points indicating that input cost pressures are high. The ratio of raw material to sales increase 180 basis points y-o-y, only slightly lower than the 200 basis points y-o-y increase in Q3FY18. In most companies margins are expanding on the back of better operating leverage.
Nonetheless, 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. The management at Hero MotoCorp believes the demand outlook is encouraging and that the two-wheeler industry should report a volume increase of 9-10% in 2018-19.
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.