Going by the first crop of results for the three months to June, it seems like earnings season has got off to a good start, helped by a favourable base effect; Q1FY18 was the pre-GST quarter and saw companies offloading stocks. But while headline numbers look good—propped up in some cases by asset sales—there is devil in the detail. To be sure, the results are not easy to read this time around, given the many one-offs and accounting changes. Which is why, extrapolating these results to conclude there is a sustainable turnaround in the offing, would be a stretch.
Larsen & Toubro’s street-cheering performance, with a year-on-year margin expansion of 200 basis points (bps), for instance, must be viewed in the context of the low base and other factors, as must the revenue growth. The good news is that order inflows jumped 37% y-o-y during the quarter, but the bad news is that the ordering will continue to be dominated by the government sector because private companies aren’t spending too much on capex just yet.
For a small but well-represented sample of 242 companies, net sales increased a good 17% year-on-year; however, since expenditure increased a slower 16% y-o-y, operating profit margins expanded 63 basis points allowing operating profits to grow 21%. Input cost pressures remain but are more moderate than in many of the recent quarters—the ratio of raw materials to sales was up 101 bps y-o-y. A closer look reveals several pressure points; less than exciting consumer demand and huge competitive intensity are teaming up to rob companies of pricing power as they struggle to hold on to volumes. There is a price war breaking out in the motorcycle market that threatens to hurt both Bajaj Auto and HeroMotocorp. In Q1FY19, Bajaj Auto’s operating profits were below estimates, thanks to a slight deterioration in product mix and bigger discounts aimed at growing market share. The tariff war in the telecom space continues with Bharti Airtel posting poor profits.
Consumer spends are on the rise but aren’t as buoyant as one might have expected with cash now back in the economy and the pain of GST easing. But, there is no doubt about a fair degree of purchasing power with some sections of the population; Maruti Suzuki’s smart jump in revenues of 28% y-o-y was the result of a richer product mix and not just better volumes. Asian Paints did well, partly helped by the low base with stand-alone volumes estimated to have jumped 13-14% y-o-y in Q1FY19. It was a steady quarter from Hindustan Unilever—volumes were up about 12%, but on a flattish base—and margins rose 100 basis points y-o-y adjusting for GST, but analysts are pretty sure the momentum will taper off soon. The performance of companies in the core sector remains subdued either because demand isn’t really buoyant or because fuel and other costs are hurting. Despite Ultratech’s volumes growing 31% y-o-y weak realisations hurt profits. Elevated commodity prices continue to eat into margins across sectors. At Ultratech, the increase in costs meant the ebitda rose just 4% y-o-y while Maruti’s ebitda, too, missed estimates as other expenses rose. Even TCS, which turned in a good quarter, was helped by the fall in the rupee. It has been a good quarter so far but not great yet.