With a fair amount of de-stocking across sectors ahead of GST, corporate earnings for the June quarter were always expected to be subdued. However, even as companies have been weighed down by the transition—Godrej Consumer reported a fall in profits for the first time in six years—higher input costs are also beginning to pinch; at a time when top-line growth is muted, this is pressuring margins. Indeed, had it not been for the turnaround performances of metals producers and commodity players, the results would have been even more disappointing. For a sample of 259 companies (excluding banks and financials) net sales have increased by 8.5% y-o-y; excluding Reliance Industries and Vedanta, the revenue growth falls to less than half at just 3.6% y-o-y. Even accounting for the fact that the environment is disinflationary, the growth is unimpressive. In the absence of strong sales growth, margins have been dented; even including RIL and Vedanta, the ebitda margin for the sample has contracted 114 basis points with raw material costs rising nearly 200 basis points y-o-y. At cement maker ACC, for instance, both freight and fuel charges increased during the quarter.
To be sure, margins were also dragged down by other factors. Maruti Suzuki, for instance, paid dealers a one-time compensation for the transition to GST and also higher discounts to clear dealer inventory which pulled down gross margins by 40 bps y-o-y. The really bad news is that any signs of a recovery in private sector capex continue to elude. It is, by and large, the government that is investing in projects, according to R Shankar Raman, director, L&T. Order inflows at the engineering major actually fell during the quarter though that was partly due to a base effect. The company’s infra division reported a big jump in order inflows which is heartening.
Until the investment cycle turns, it is unlikely the economy will gain too much momentum. In particular, construction and real estate need to see a meaningful pick-up in activity to trigger a multiplier effect. In the meanwhile, a reasonably good monsoon should boost rural incomes. Once wholesalers adjust to the new system—which should happen fairly quick—volumes should pick up. If the July wholesale auto numbers are any indication, inventory is being built up fairly quickly. Maruti Suzuki posted a robust 22% y-o-y rise in volumes while Mahindra & Mahindra reported a 20% y-o-y jump. This could translate into strong retail sales with the festival season round the corner. However, while demand for a host of consumer durables should see an uptick, especially since government employees now have bigger pay packets, the outlook for industrial products is still somewhat hazy. Also, some sectors like IT and telecom have been affected by specific factors—global headwinds in the former and RJio for the latter; pharma firms are battling regulatory problems in overseas markets. All in all, India Inc is still not out of the woods.