As earnings season draws to a close, it is clear India Inc’s recovery is going to be a slow one and it is primarily the ability to rein in costs, on the back of soft commodity prices, that is driving operational efficiencies. Demand continues to be tepid for consumer and capital goods and this is true not just for the home market but also some overseas markets. Moreover, the competitive intensity, across a host of sectors, especially in the services space, continues to rob companies of pricing power.
The aggregate revenue growth for a clutch of 2,045 companies, in the June quarter was 9.2 per cent year-on-year but if Rajesh Exports —which made a large acquisition in July 2015 — is excluded the growth slips to an anaemic 3.2 per cent y-o-y.
Most heavyweights have turned in performances that are below the Street’s expectations and chances of earnings being downgraded are high. Anticipating some headwinds, globally and locally, analysts have downgraded estimates for nearly two dozen heavyweights like Infosys and Wipro.
The bad news is that the capex cycle doesn’t seem to be turning: at Larsen & Toubro, orders inflows from the infrastructure segment were negligible indicating firms are not adding to capacity immediately. The Mahindra and Mahindra stock has been downgraded by a few analysts who believe volumes for the auto player could moderate in a competitive environment. The Street was disappointed with M&M’s operating profits for Q1FY17 which were pressured by the sharp fall in realisations for tractors and lower-than-anticipated margins for the automotive business.
The real estate and infra sectors don’t appear to have bottomed out just yet. Godrej Properties, for instance, sold area worth Rs 386 crore in Q1FY17, making it one of the slowest quarters in the past three years. Operaing cash flows were negative and the firm’s debt increased. Firms such as Adani Power remain highly leveraged; the power producer’s debt is currently Rs 52,000 crore. Order inflows into smaller capital goods makers such as Thermax have seen subdued falling sharply by 20 per cent during the quarter; there were no large wins and stand-alone energy segment order inflow of Rs 440 crore — down 33 per cent — was a 17-quarter low.
While most companies have switched to Ind-AS accounting norms and adjusted previous numbers to ensure exact comparisons, the new norms have resulted in some changes. In the case of JSW Steel, analysts point out, the net debt increased by Rs 6,900 crore sequentially to Rs 45,400 crore due to the Ind-AS impact.
However, at firms such as Bajaj auto, better product mix has help boost the average selling price thereby helping offset a drop in volumes. Weak exports resulted in revenues for the motorcycle maker rising just 2.7 per cent y-o-y in the three months to June as total volumes came off by 2 per cent y-o-y.
That the economy remains somewhat sluggish is evident from the performance of players in the core sector. Ultratech missed ebitda estimates. 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.
Analysts believe that although 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—the momentum in the sales of trucks, which have shown an uptick over the past six to eight months, may not sustain. The growth in volumes in June actually slowed to 1.9 per cent and industry watchers don’t see any sharp uptrend soon.