Soft input prices help firms rein in expenses, capex cycle doesn’t seem to be turning just yet.
Sales at India Inc crawled in the September quarter as companies struggled to push through volumes even as pricing power eluded most. Fortunately, commodity prices remained soft, helping them to rein in expenses and protect their operating margins.
Managements remain cautious, citing a challenging demand environment. Sanjiv Mehta, MD, HUL, said there were no visible signs yet of an improvement in rural demand, adding that rural growth had slowed to 0.5 times urban growth — an all-time low.
The Asian Paints management said it had seen a slower growth in premium and luxury products and that growth in the metro and tier I cities had been slower than that in the smaller towns. The company took price cuts for some products. The management at HeroMotoCorp said, though a good monsoon and a good rabi harvest would help boost farm incomes, it was circumspect on the outlook, saying that sustained recovery in the domestic two-wheeler industry would take time. The management at JSW Steel trimmed volume guidance by 3% for FY20, lowered the capex guidance by Rs 500 crore and postponed a few downstream units.
Revenues for a sample of 383 companies have fallen by about 2.5% y-o-y.
However, with total expenses lower by 3.2% y-o-y on the back of a sharp decrease of 250 basis points fall in the raw materials bill, the operating profit margins expanded 70 basis points y-o-y.
The profit before tax (PBT) was down 3.3% y-o-y while net profits rose 12.6%, partly the result of a much lower tax bill — down 42% y-o-y. Subdued loan growth at virtually every bank and NBFC is evidence of the sluggishness in industry. At SBI, for instance the corporate book grew just 2% y-o-y.
The capex cycle doesn’t seem to be turning just yet.While Larsen&Toubro reported good order inflows, up a smart 20% y-o-y, much of it was won internationally with the domestic wins staying subdued.
Top line growth has been stunted across companies. At JSW Steel, revenues fell 18.5% y-o-y as net realisations dropped 16% y-o-y while at Maruti Suzuki sales were down 24% y-o-y. Two wheeler manufacturers struggled in a weak demand environment: at TVS Motor, revenues were down 13% y-o-y on the back of volume decline of 19% y-o-y while at HeroMotoCorp they dropped nearly 17% y-o-y. Although volumes at Asian Paints rose an estimated 15% y-o-y, domestic revenues disappointed at an increase of 9% y-o-y, below estimates; analysts attributed this to a deterioration in the product mix. The consumer space too struggled as demand in rural India remained muted; volumes at Marico were poor up just about one %, resulting in flat sales while at Hindustan Unilever (HUL) volumes grew 5% y-o-y. Subdued consumer spends in urban India hurt retailers; Shoppers Stop reported a 2% y-o-y fall in same-store-sales, led by a 10% fall in footfalls. Smaller companies such as Rallis reported weak revenues, up just 4% y-o-y. At Havell’s revenues increased by just 1.8% y-o-y, while at Compton Greaves Consumer they were up just 4% y-o-y. Volumes at ACC were lower 2% y-o-y.
The stand-alone business at Tata Motors fared poorly with sales of medium and heavy commercial vehicles staying subdued reflected in the revenue drop in excess of 40% both in commercial vehicles and passenger vehicles; analysts forecast the demand weakness will last another few quarters.
While softer commodity prices helped some business rein in costs and protect their margins, there were several cases where margins contracted. At Rallis, the numbers were marked by a sharp 600 bps contraction in gross margins and a 300 bps fall in operating margins. At Shoppers’ Stop ebidta (earnings befire interest depreciation and tax) margins contracted 70 bps y-o-y. At Tata Motors, the commercial vehicles business remained under pressure and consequently, the stand-alone ebitda margin crashed to to 3.8% from 11.4% a year ago.