While the acute scarcity of cash following demonetisation has no doubt impacted corporate earnings for the December 2016 quarter, at an overall level, the results aren’t as bad as feared. To their credit, managements have coped well with some taking steps to incentivise the trade to keep the business going and keeping a tight control on costs. Indeed, the headline profit numbers look positively stunning—up 24% yoy for a sample of 2,570 companies. But the earnings are primarily the result of a modest increase in costs which are up just 3.5% yoy, nearly 200 basis points less than the increase in sales—a host of companies such as Bajaj Auto, Dr Reddy’s Labs and ITC have all managed to rein in their expenses. In other words, with input costs still reasonable, companies are able to eke out fairly healthy operating margins. The big kicker for profits in Q3FY17 has, of course, come from the sharp turnaround in the fortunes of metals producers such as Vedanta where profits surged 356% yoy, Tata Steel, which swung from a loss to a profit, or SAIL where losses narrowed significantly.
Otherwise, the rest of India Inc isn’t recovering as fast as one would have wished—that is evident from the rather modest increase in the sales, for a clutch of 2,570 companies, of just 5.4% yoy. The increase may be better than in the previous three quarters but given commodity prices having risen by anywhere between 15-20%, turnovers should have grown faster. That they have not indicates companies aren’t able to push through volumes; moreover, the shortage of cash would have dampened demand further. Indeed, from consumer giants like Hindustan Unilever to infrastructure players such as Sadbhav Engineering or IRB Infra and two-wheeler manufacturers HeroMotocorp, the scarcity of cash has hurt business badly though most management have indicated a recovery starting mid-December. Some, such as Maruti Suzuki, have got away lightly thanks to a big jump in sales to the government. But real estate companies have reported big falls in sales—anywhere between 30 and 60%—not surprising given that most transactions have a big element of cash and also because prospective buyers are hoping for a further correction in prices. Business at capital goods firms wasn’t too brisk either—both L&T and BHEL reported dull numbers. L&T’s top line stayed flat while order inflows fell 10% yoy. At BHEL, the order back log was disappointing at R98,400 crore, down 10% yoy and 5% qoq indicating the capex cycle isn’t turning just yet.
While demand for consumer goods should bounce back now that there is cash in the system, analysts expect spends will be restricted to small-ticket items. That could further delay the rebound in the economy since sectors such as cement or construction depend heavily on the real estate market. The recovery will also be delayed by the slowdown in the IT space which faces several global headwinds including restrictions on visas and Brexit. Given its huge employment-generating potential, this is a big concern. Indeed, the twin issues of rising commodity prices and a slowing IT sector will dominate corporate earnings in the quarters to come and it’s hard to see any big shift in the growth trajectory.