Corporate earnings for the three months to December 2017 so far aren’t really much to cheer about even though they come off a very favourable base—Q3FY17 was the demonetisation quarter.
Corporate earnings for the three months to December 2017 so far aren’t really much to cheer about even though they come off a very favourable base—Q3FY17 was the demonetisation quarter. To be sure, the impact of the disruptions to the economy from demonetisation and the rollout of the GST on companies appears to be fading. This is seen in the smart 11% y-o-y rise in volumes at Hindustan Unilever and the reasonably good volume increases at a clutch of smaller FMCG companies, albeit on a very low base. Nonetheless, much of the disruption in wholesale and retail trade channels following the roll-out of the GST on July 1 seems to be over. Moreover, the management commentary from several of the consumer staples companies suggests the sentiment has taken a turn for the better. However, it is too soon to extrapolate this to all consumer businesses because the spends seem to be restricted to small-ticket items for the moment. At Asian Paints, for instance, volumes were not as high as one might have expected—rising just an estimated 6% y-o-y—prompting analysts to conclude this might be the reason why the company has desisted from making price hikes although input costs having risen. At Ultratech, too, prices were flat y-o-y and fell 5% q-o-q although volumes were reasonably good. But, cigarette major ITC’s revenues came off a sharp 26% y-o-y due to weak volumes.
Indeed, at an aggregate level, while the topline number is satisfactory, the profit numbers are less so. For one reason or another, whether it is higher raw material costs or a shortage of inputs, companies have found it hard to improve their performance. Consolidated revenues at Adani Power fell by 11.4% as the utility produced less power due to fuel shortages. Most heavyweights appear to be adjusting to some change or other in the environment—either globally or locally—which is probably why there are no big surprises. The continuing tariff war has eroded the profits of the two telecom companies in the sample.
While Idea Cellular reported a loss of `1,352 crore, Bharti Airtel’s profits plunged 39%, missing the Street’s estimates, as the regulator tweaked interconnection charges. For a sample of 149 companies (excluding banks and financials), net sales have risen close to 13%; the increase would be far lower if Reliance Industries was to be excluded. The operating profit margins have expanded by just under 50 bps y-o-y because expenditure has been reined in. While profits may have been higher by 24% y-o-y, they have been boosted by other income. Of the total profits for the sample of Rs 41,000 crore, close to Rs 12,000 crore is other income. Moreover, profits have been boosted due to lower taxes.