With neither consumption demand nor investment expected to pick up soon, there’s more pain ahead
The most telling statement during earnings season usually comes from R Shankar Raman, director, Larsen &Toubro. For nearly a dozen quarters now, Shankar Raman has been saying that private sector capex is some time away. This time around too, he was as pessimistic, estimating it could take anywhere between 12-18 months before the private sector starts adding capacity.
That is pretty much the tone. The Asian Paints management believes the environment is challenging and is keeping its fingers crossed the monsoon is a good one. At HUL, the management suggested no triggers for an immediate demand recovery, citing the slow rhythm of the economy and persistent channel liquidity issues. Tata Motors chief financial officer, PB Balaji expects ebit margins for the domestic business to see a marginal correction due to ‘market uncertainties’. Tata Motors reported a debilitating loss of Rs 3,679 crore for the three months to June, a reflection of the anaemic demand both at home and overseas.
If one was to ask whether the worst is over or whether there is more stress ahead, it would be safe to say it could get worse before it gets better. It is not easy to recover from a staggering Rs 4,800 crore loss that Vodafone/Idea posted, especially since this isn’t the first loss; at JSW Steel, consolidated profits plunged by over 50% year-on-year (y-o-y).
There is some expectation the environment will change in the second half of FY20, but the optimism seems largely misplaced. It’s possible though managements are merely making the right noises to keep the morale up. Because right now, it’s hard to see what exactly is going to trigger the revival. It can’t be consumption demand; the high frequency data isn’t pointing to a recovery just yet.
SIAM on Friday lowered the guidance for passenger vehicles from a growth of 3-5% to a de-growth of
2-3%; for CVs it trimmed the estimate from a10-12%increase to just 2-3%. The farm sector remains in deep distress as seen from the high and rising delinquencies at M&M Financial Services; the gross NPAs inched up 30% plus quarter-on-quarter (q-o-q) to 7.4% due to seasonal weaknesses, but analysts are convinced these will rise further given the sharp deterioration in the economic environment. In a worrying observation, analysts at Nomura noted that while historically, asset quality has had seasonality, a 30% q-o-q spike in GNPAs, coupled with a worsening economic situation, increasing rural stress and a weaker monsoon leads them to believe that the asset quality improvement cycle has peaked. Indeed, given the large number of ratings downgrades over the past three months it is clear the NPA cycle is far from peaking. That is a wake-up call to be heeded and already, analysts have started paring earnings; there are sure to be many more cuts before the season is over.
They have good reason to do so, because this slowdown isn’t going away in a hurry. Both the engines—private household consumption led by a deceleration in savings and accelerated government spending on the back of large deficits—may be sputtering. Prospects of more job cuts—1,700 at the Nissan factory—are going to hurt demand further. At Jubilant Foods, for instance, same-store sales grew just 4.1% y-o-y, slowing down from the 6% levels reported in 4QFY19. Credit flows to several sections of the economy have been cut off, with many of the NBFCs strapped for liquidity and some close to insolvency; while banks may be flush with funds, they are reluctant to lend, except to top-rated clients. That, then, excludes the vast majority of borrowers. A good example of this can be seen in HDFC Bank’s Q1FY20 loan growth, which at 17% y-o-y was the slowest in the past ten quarters. The lower growth is the result of a steep decline in corporate lending, slowdown in unsecured loans, and muted growth in auto and two-wheeler credit. Kotak Mahindra Bank (KMB) has also seen a moderation in loan growth; the book including Kotak Prime grew 15% y-o-y, given a sharp moderation in the vehicle segment, down 4% y-o-y. Additionally, corporate loans are seeing an economy-linked slowdown; they grew at about 9% y-o-y.
The Budget provided no stimulus whatsoever; in fact the total capex budgeted for 2019-20 is lower than it was last year. If demand does not pick up soon, manufacturers will find it hard to raise prices; at this point though, even bigger volumes would be helpful. At Maruti Suzuki, volumes fell 18% y-o-y during the quarter while at JSW Steel they fell 3% y-o-y. Also, given that there has been a fair bit of belt tightening these past couple of years—savings have been eked out from employee exits, efficient procurement of raw materials, less capex and better inventory management of working capital—it is hard to see much more taking place. A fall in input prices would, of course, come as a big boost to users, but not to producers.
Indeed, the India Inc spreadsheet is not a pretty sight. There may not be too many blotches of red, but most companies are struggling to hold on to their profits. Profits for a sample of 252 companies have fallen 14% y-o-y in Q1FY20. While managements have been working hard to rein in costs, margins are under pressure contracting 40 basis points y-o-y; excluding TCS and Reliance, revenues grew just 3.5% y-o-y while profits crashed 28% y-o-y. From telecom to two-wheelers and cars to consumer goods, there’s pain everywhere. We need to do more than pray.