Apart from a select few companies, the rest of India Inc seems to be grappling with one problem or another—lacklustre demand, intense competition, elevated commodity prices or the rising cost of loans. Indeed, the economic environment is a challenging one in which there is very little capital expenditure by the private sector and private consumption, too, seems to be slowing. There are some encouraging signs in the September quarter results—the strong showing by Larsen & Toubro (L&T) which reported a 46% jump in order inflows, for instance.
But for every L&T, there is a Tata Motors which posted a loss for the second consecutive quarter, and a Bharti Airtel. While the Q1FY19 results weren’t extraordinary, there were signs of an uptick in demand, and a reversion to levels seen pre-demonetisation. However, the spike in crude oil prices, as also some other commodities, has been driving up raw material costs which companies are not able to pass on fully. The automobile sector is one where weak demand has robbed companies of pricing power. Whether at Maruti Suzuki or TVS Motors, managements talk of an extremely challenging demand environment in which it is hard to take price hikes. In fact, consumers are beginning to down-trade according to some analysts. Most consumer-centric companies have found it hard to protect their margins. Moreover, the heightened competitive intensity in sectors such as telecom has bruised the bottom lines of market leaders like Bharti Airtel whose India business reported a loss during the quarter. It is not just profitability, but often profits, too, that have taken a beating. Net profits at Hero MotoCorp, for example, were down 3.4% y-o-y.
As the aggregate headline numbers show, revenues for a universe of 717 companies (excluding banks and financials) are up a good 24% y-o-y—partly on the back of better volume growth but also because commodity prices are high. However, expenses have shot up and consequently the operating profit margins, for the sample, have contracted 200 basis points y-o-y. Excluding RIL and TCS, profits for the sample rose by 3.8% in Q2 while sales rose by 20.4%. These two companies account for 15.2% of the sample’s revenue.
That is a very ordinary performance, despite a weaker rupee having helped the entire IT and pharma pack significantly. Economists at Nomura pointed out recently that while rural demand had been holding up, that, too, may have started moderating; sales of tractors and two-wheelers have been very subdued in recent months. It is possible rural demand will sustain on the back of better support prices for crops. But, urban demand remains muted. Unless the government raises its spending, infrastructure sector players such as BHEL will find it hard to sustain even the current ordinary performances.