While revenues have risen fairly well, operating margins have contracted; few firms are able to pass on higher input costs.
The stupendous performance of Larsen & Toubro (L&T) in Q2FY19, as also the 46% year-on-year jump in order inflows, signals some improvement in the capex cycle. However, much of India Inc is just about muddling through with weak demand, intense competition and high input costs hurting companies badly.
Some like Tata Motors, which reported a loss for the second consecutive quarter, struggle to negotiate a tough overseas environment.
It’s a tough market in which demand is subdued, the competition intense and raw material costs high. Most management teams like the one at Asian Paints say domestic demand remains challenging. Rajiv Bajaj, managing director, Bajaj Auto, too has pointed out it is difficult to take price hikes. At Bajaj Auto, the operating margin dropped sharply by about 300 basis points y-o-y to 16.8% with the company compelled to adopt an aggressive pricing strategy for its entry-level motorcycles. Net profits at HeroMotoCorp were down 3.4% y-o-y. The two-wheeler manufacturer reported operating profits or ebitda that were lower by 5% year-on-year following weak gross margins which were impacted by input cost pressures.
Most consumer–centric companies continue to face top line pressures; Dabur reported muted numbers missing expectations. Promotion costs ate into profits which were up just 4% y-o-y — consolidated gross margins fell 75 basis points y-o-y.
As analysts pointed out, the management’s bullish tone has been traded for a more realistic assessment of the markets.
Maruti’s top line grew by just 3% during the quarter thanks to a 2.0% y-o-y improvement in net average realisations. Bharti Airtel reported a weak quarter with the tariff war continuing; the India business posted a net loss of `1,646 crore, wider than the loss of `940 crore in the preceding quarter. The down-trading is hurting realisations and revenues. Intense competition has also hurt Interglobe Aviation where yields came in lower than expected and fuel costs hurt the bottom line; the company reported a PBT loss of ` 990 crore.
The economic environment is a challenging one in which there’s very little capital expenditure by the private sector and private consumption too seems to be slowing. The spike in crude oil prices as also some other commodities has been driving up raw material costs which companies are not able to pass on fully. The automobile sector is one where weak demand has robbed companies of pricing power. Whether at Maruti Suzuki or TVS Motors, managements talk of an extremely challenging demand environment in which it is hard to take price hikes. The heightened competitive intensity in sectors such as telecom has bruised the bottom lines of market leaders like Bharti Airtel whose India business reported a loss during the quarter.
As the aggregate headline numbers show, revenues for a universe of 717 companies (excluding banks and financials) are up a good 24% year-on-year — partly on the back of better volume growth but also because commodity prices are high. However, expenses have shot up and consequently the operating profit margins, for the sample, have contracted 200 basis points y-o-y.With little support from other income, net profits have risen by just 7% y-o-y despite a weaker rupee having helped IT and pharma companies. While rural demand had been holding up that too may have started moderating and unless the government ups its spends, demand could weaken further.
Businesses in the core sector are doing reasonably well but profitability remains under pressure. At ACC, ebitda rose by only 7% y-o-y in the September quarter below estimates even though volumes were up a reasonably good 10% y-o-y. UltraTech’s earnings were below expectations since it reported a drop in ebitda of 4% y-o-y and also a fall in the net profit. While a host of companies has been deleveraging its balance sheets over the past few years, there are companies with high leverage. JSW Steel’s net debt went up by nearly `6,000 crore in Q2FY19 and analysts believe there will be pressure on the financials due to acquisitions and the impact of unfriendly trade environment on exports. With elections due soon, the environment could turn a little more difficult for engineering companies as ordering may get delayed. At BHEL, order inflows were reasonably good in Q2FY19 on a weak base but revenues were up just 6% y-o-y while margins were disappointing. However, ABB India turned in a good set of numbers posting a 30% growth in revenues which helped drive up operating margins by 70 bps y-o-y. Both TCS and Infosys reported good results helped by a weak currency but smaller firms didn’t do too well.