India Inc builds on recovery

By: |
October 27, 2021 4:30 AM

Margins aren’t great for most, but strong sales momentum evident; rising input costs, however, remain a headwind

While elevated input costs could rein in profit margins, better momentum in revenues in the coming quarters could soften the blow.While elevated input costs could rein in profit margins, better momentum in revenues in the coming quarters could soften the blow.

After a stunning comeback post the first wave of the pandemic, corporate India continues to build on the recovery. Early-bird results are not spectacular, because margin pressures are in evidence, but there is sales momentum. Some of this is coming from better volumes, but surprisingly, also from price hikes. It is not only the commodity producers that are enjoying a bull run with strong realisations, manufacturers of other products too have been able to take price hikes to pass on the rising input costs.

Aggregate sales for a sample of 202 companies (excluding banks and financials) were up 35% year-on-year in the three months to September; excluding Reliance Industries (RIL), however, the increase is a lot more sober, at just 27% y-o-y. The bottom line too loses some of its sheen if RIL is excluded; the increase is just 22.5% y-o-y, smaller than the 26.5%y-o-y for the sample. Again, IT players dominate the sample with their good performance; every software services firm has done well, their sole worry being the high attrition levels.

It has been a lot harder for the retailers and the FMCG lot. While demand is returning across markets—urban and rural, Tier1 and Tier 2 cities—it is taking its time. On the subdued base of Q2FY21, the sales growth was reasonably good. At retailer Avenue Supermarts, the stand-alone revenues were up nearly 50% y-o-y, driven by better footfalls post the second wave. Standalone revenues at Shoppers Stop more than doubled y-o-y, helping the retailer report a positive ebitda and narrow the net loss.

Local two-wheeler sales continued to be somewhat lacklustre but strong exports boosted revenues. TVS Motor, for instance, reported a smart 22% y-o-y increase; export volumes jumped 46% y-o-y while domestic volumes fell 8% y-o-y. While demand for entry-level motorcycles was weak, production of premium motorcycles was hit by the shortage of chips.

Not all companies were able to take price increases to protect margins; indeed, some, like Asian Paints, preferred to grow volumes and retain market share at the cost of margins. Consolidated gross margins at Asian Paints contracted by 965 bps y-o-y. At Hindustan Unilever, gross margins contracted 140 bps y-o-y while ebitda margins fell 45 bps y-o-y. Again, the higher prices of edible oils and packaging materials dragged down the gross margins at Nestle by 240 bps y-o-y.

If the inflation in inputs continues, even commodity producers could be hit; analysts point out that higher raw material costs—of items such as coal—are already offsetting the gains from better realisations for some steelmakers. The ratio of raw materials to sales for the sample was up 355 bps, resulting in a contraction in the operating profit margin (opm) of about 45 bps y-o-y.

Nonetheless, the recovery was fairly broad-based. At Indian Hotels, for instance, the domestic business had recovered to 86% of pre-Covid revenues while the international portfolio was back at 62% of pre-pandemic levels. Management commentary has been fairly reassuring and companies are confident business will pick up as the economy opens up and there is greater mobility.

Indeed, some players continue to take away share from unorganised and smaller players. While elevated input costs could rein in profit margins, better momentum in revenues in the coming quarters could soften the blow.

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