Though sales for early-birds rose 25% in the September quarter, high raw material costs ensured profits grew just 3.5%
India Inc is grappling with several problems, among them a weak demand environment, intense competition across sectors and elevated prices of raw materials. That is evident in the performance of the first set of companies that have announced their results for the September earnings season. Net sales for a sample of 236 companies (excluding banks and financials) may have risen some 25% y-o-y, but the bottomline is that the net profits have gone up by just 3.5% y-o-y. The culprit is raw materials, which as a proportion of sales, has jumped some 270 basis points y-o-y, thereby driving up the total expenditure. It gets worse if Reliance Industries and TCS are excluded from the sample; the rise in revenues falls to just 14% and the net profit falls by 4.6%. Thanks to various factors—slowing job creation in particular—demand is sluggish, whether for two-wheelers or airline tickets, and consumers are starting to downgrade.
Management commentary—which was just cautious after the June quarter earnings season—has turned pessimistic, which is worrying since we are in the midst of the festive season. CEOs have spoken about how they can take only very limited price increases to pass on the higher input costs because, otherwise, they are likely to lose volumes. Even if they are able to push through volumes, realisations are muted—revenues at Maruti Suzuki, for instance, rose by about 4% y-o-y in Q2FY19. Nonetheless, some companies like TVS Motors are taking small price hikes. Net profits at Hero MotoCorp were down 3.4% y-o-y. The two-wheeler manufacturer reported operating profits or ebitda that were lower by 5% y-o-y, following weak gross margins that were impacted by input cost pressures.
The competitive intensity in sectors such as telecom continues. With no end in sight to the tariff war, Bharti Airtel’s India business posted a net loss of Rs 1,646 crore, wider than the loss of Rs 940 crore in the preceding quarter. Indeed, thanks to some heavy capacity addition over the past year, airlines aren’t able to earn yields that are enough to pass on the higher fuel costs. Interglobe Aviation reported a PBT loss of Rs 990 crore. 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 which was 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.
Much of the improvement seen in some businesses is thanks to a favourable base effect, since both GST and demonetisation had disrupted the economy badly. At BHEL, order inflows were reasonably good in Q2FY19 on a weak base but margins were disappointing. Again, in some instances, the quality of the earnings growth isn’t quite what it should be. For instance, at Hindustan Unilever, the pricing component was lower than it has been in the last six-seven quarters, possibly due to competitive pressure in the sector. To be sure, some firms have done well—Nestle and ITC, for instance. However, there is little doubt that earnings estimates are likely to be downgraded for most companies which is one reason share prices are falling. Indeed, with elections coming up, fuel prices still elevated, interest rates moving up and liquidity tight, there is not much to look forward to in the next six months.