Sustained recovery still afar for Corporate India

Firms gain from low input costs but weak demand sticks

By: ENS Economic Bureau | Mumbai | Published:September 12, 2016 2:53 am

With earnings season drawing to a close, it’s abundantly clear India Inc has some way to go before one can call a sustained recovery. For a clutch of 2,531 companies (excluding OMCs, banks and financials), net sales in the three months to June have risen just 1.6 per cent year-on-year. Even allowing for a disinflationary environment, the poor top line growth reflects demand is anaemic. Going by the flat or very subdued increases in realisations, it appears the weak demand for consumer goods and services sectors has aggravated competitive pressures.

Companies have, however, benefited from benign prices of raw materials which have helped them rein in costs — the ratio of raw material to sales dropped 240 basis points y-o-y. While this helped operating profits grow 7.5 per cent y-o-y, net profits were up just 5 per cent y-o-y. Companies also gained from flat employee expenses which increased by less than 1 per cent though that doesn’t augur well for consumption spends.

Analysts have trimmed estimates for FY17 and FY18, albeit, marginally. The quality of earnings, they believe, is not as good as they would have expected and has been boosted by some non-operational factors.

For instance, anti-dumping duties have bumped up profits of companies in the metals sector.

The capital goods segment has turned in a very ordinary show. BHEL reported order backlog of Rs 1.1 lakh crore, down 7 per cent y-o-y and down 2.5 per cent q-o-q and analysts believe order inflows will remain muted for the rest of FY17. Order inflows at Thermax were slow falling sharply by 20 per cent during the quarter because there were no large wins; stand-alone energy segment order inflows were down 33 per cent, a 17-quarter low. At Larsen& Toubro, orders inflows from the infrastructure segment were negligible indicating companies are not adding to capacity anytime soon.

Most companies in the core sector reported either poor or just satisfactory results. SAIL’s Q1FY17 earnings were disappointing, both on the volumes and realisations fronts. The improvement in earnings, analysts said, came largely from the change in accounting standards whereas operationally, the steelmaker failed to ramp up the expanded capacity or check costs.

Ultratech missed ebitda estimates, which came in at Rs 1,370 crore, up 26 per cent y-o-y, thanks to lower than expected volume growth of 6 per cent y-o-y. Reported revenues at Rs 6,180 crore were up just 2 per cent y-o-y. Analysts pointed out JSPL’s consolidated ebitda was only marginally higher than its interest costs; the firm reported a net loss of Rs 1,080 crore after taking an impairment charge of Rs 630 crore for overseas fixed assets.

Hindustan Zinc’s ebitda fell 38 per cent y-o-y due to smaller amounts of metals mined, down 45 per cent y-o-y, due to higher waste mining.

Consumers appear to be spending cautiously; Jubilant Foodworks’ standalone earnings missed estimates with same store sales slipping into negative territory. Operating profits fell 14 per cent y-o-y while net profits plummeted 31 per cent. HUL reported weak earnings with volumes growing just 4 per cent year-on-year, a reflection of further deterioration in demand and decelerating market growth in the hinterland. Domestic consumer revenues grew at around 3.6 per cent, suggesting modest price deflation for the portfolio.

Companies such as Ashok Leyland have done well during the quarter — revenues rose10 per cent y-o-y led by a 15.5 per cent increase domestic volumes. However, industry watchers fear the momentum in the sales of trucks, which has shown an uptick over the past six to eight months, may not sustain.