Editorial: Poor quarter ahead

By: |
January 26, 2016 12:23 AM

Early birds don’t suggest any quick turnaround

It is early days, but the first cut of earnings from India Inc for the December quarter don’t suggest any turn in fortunes. For a sample of 145 companies (excluding banks and financials), net sales fell by about 6% y-o-y—mostly the impact of the continuing downtrend in commodity prices, but also the inability of makers of consumer goods to achieve realisations in a disinflationary environment. Companies have found it difficult to even drive volumes or maintain markets due to weak urban and rural demand. So, while Hindustan Unilever Limited (HUL) managed to clock in a reasonably good volume growth of 6% y-o-y—for the fourth consecutive quarter—revenues rose an anaemic 3% y-o-y. Again, At UltraTech Cement, realisations fell 2% y-o-y but the company sold higher volumes of cement, up 7% y-o-y, which was higher than the industry average of 4.5%. At a time when there is surplus capacity across sectors and purchasing power limited, competitive intensity has risen, keeping profitability under pressure. At Idea Cellular, subscriber acquisition costs are rising. Smaller firms are bearing the brunt of the slowdown. At Exide, sales fell 2% y-o-y, with demand remaining weak in the automotive OEM and most industrial-battery segments.

While urban demand is not as strong as one might have wanted, it is the severe stress in the rural economy, resulting from a couple of sub-normal monsoons and no significant construction activity which is cause for concern because rural incomes are barely growing. Unfortunately, as managements at firms such as Mahindra & Mahindra Financial observe, there are few signs rural demand will revive soon. M&M Financial’s profits crashed 51% y-o-y in Q3FY16 and analysts believe more of the financier’s loans could turn toxic—gross NPLs in the third quarter crossed 10%—since the slowdown in the hinterland is tipped to be a prolonged one. Thanks to the lower cost of raw materials, operating margins for a host of manufacturing companies are afloat. However, the sharp depreciation of the rupee could hurt net importers—say, those that import coal—wiping out the gains from falling prices. Exporters, however, should become more competitive even if globally the trading environment is sluggish. While some analysts expect consumer demand could get a boost from the spike in government salaries in FY17, this will at best be temporary. Ultimately, if rural demand is to pick up, there needs to be more construction activity. And, of course, the rain gods must be kind.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Digital, finance & tech: DiFiTe-disruption era; ‘dishoom dishoom’ continues
2GDP: Growth is real, but challenges abound
3Covid-19: Patents waiver crucial to vaccinating the world