IT firms are a saving grace, else, the December 2018 quarter would have been a washout for India Inc
As the headline numbers show, it has been a disastrous earnings season, leaving India Inc in deep distress. Profits for a universe of 1,995 companies fell 30% y-o-y in the December 2018 quarter although revenues were up a decent 19% y-o-y. The simple fact is raw material costs and other expenses remain elevated but not too many companies are able to pass these on to consumers or end users because demand is so muted and the competition intense. The shortage of liquidity since September appears to have pushed up the cost of finance hurting the demand for consumer durables, while subdued investments in projects by the private sector and sluggish construction have left the demand for materials such as cement weak.
The telecom sector, in particular, has been badly bruised by the heightened competition after Reliance Jio entered the market in September 2016. But even rivals Bajaj Auto and Hero MotoCorp have been compelled to get into a price war to protect market share. The abundance of capacity in the cement sector, at a time when there is little activity in real estate, has left realisations of players like Ultratech weak. In the absence of adequate pricing power, profit margins are getting squeezed. For instance, gross margins at Mahindra & Mahindra (M&M) fell 160 basis points y-o-y due to raw material cost pressures even as inventories remained high. At Ultratech, standalone revenues were a good 16% y-o-y higher but net profits were up just 7% y-o-y, due to higher-than-expected costs.
In some sectors of the economy, recent policy changes have impacted demand adversely. For example, the changes in the axle load norms have hurt the demand for trucks of a certain size; Ashok Leyland reported a 12% y-o-y drop in revenues in Q3FY19, with volumes falling and the company not able to command pricing power. Again, the more expensive insurance policies have stymied demand for both cars and two-wheelers. In fact, the automobile sector is yet to recover from what was a very dull festive season; dealers confirm demand for cars, UVs and two-wheelers is still lacklustre and that inventories are at levels that are much higher than those typically seen at this time. Auto major M&M reported a very weak set of numbers for the December 2018 quarter with operating profit margins falling 150 basis points y-o-y.
To be sure, there were some bright spots; Larsen & Toubro delivered a splendid set of numbers, posting a 24% increase in revenues and a 27% increase in ebitda on the back of some strong project execution. While the fall in order inflows was a slight disappointment, the backlog is healthy. But core sector players, such as power generator Tata Power, are grappling with several problems and the company reported a 68% drop in consolidated profits hurt by the weak performance of its coal and infrastructure companies even as losses at its Mundra UMPP remained high. Amongst the consumer pack, Asian Paints was able to cash in on the festive season as was TVS Motors. However, management commentary has been very circumspect given how difficult it is to pass on costs to consumers. Even heavyweights such as Hindustan Unilever are not able to price products as they would like to. Had it not been for the IT firms, which are doing well in challenging conditions, the season would have been a complete washout.