It has been another disappointing earnings season from corporate India, with headline numbers coming in way below estimates; net profits for the Sensex, in the three months to September, have grown just 6% yoy while aggregate sales for a sample of 2,439 firms (excluding banks and financials) grew just 3.5% yoy. That’s an indication of how companies are neither able to push through volumes nor command pricing power in what is undoubtedly a challenging economic environment. The silver lining has been the performance of the IT sector which continues to fare reasonably well. Otherwise, management commentary has been extremely cautious. Larsen & Toubro, for instance, has tempered its revenue guidance for the current year and Arundhati Bhattacharya, chairman, State Bank of India (SBI) was unambiguous in saying the recovery was going to be a very gradual one with at least a year to go for the pace to pick up. That seems a realistic assessment given how loan growth in Q2FY15 grew at a multi-quarter low.
The core sector clearly remains under pressure and while softer commodity prices should help ease cost pressure in the months ahead, in the September quarter, several firms ended paying more for raw materials for various reasons. At Hindalco, for instance, operating profits came in below estimates, thanks largely to an increase in energy costs. Again, Tata Steel’s standalone raw material costs increased 13% sequentially because it imported more iron ore—a couple of the firm’s mines have been suspended because the leases have not been renewed.
The bad news is that capital goods firms aren’t really seeing a rush of orders although there are signs of a pick-up. At BHEL, for instance, while there was some uptick in order inflows, it came off a very low base and the firm’s order backlog at the end of the quarter remained flat yoy. Indeed, subdued volumes reported by cement companies is evidence of the sluggishness in sectors such as construction. In the consumer space, even large firms like Hindustan Unilever are finding the going tough and the management’s observations suggest that the demand environment is still soft and that there are no visible green shoots to signal an imminent acceleration in volume growth. That consumers are reluctant to spend can be seen from the weak volumes reported by players like Bajaj Auto.
With demand for both capital goods, materials and consumer durables goods still weak, firms like Tata Motors continued to do badly with the domestic business, posting a loss on the back of a marginal fall in sales. While consumer demand should see a rebound once inflation eases further and interest rates drop, the high leverage in corporate India, regulatory uncertainty and hurdles in acquiring land could delay investments in fresh capacity to FY16 or beyond. In other words, those investing in the market bull run would do well to pencil in 4-6 quarters of subdued growth.