Q2 earnings: Sales dull, but cost cuts help companies save cash

A good part of the overall demand seems to be stemming from rural and small-town India.

With business in urban areas somewhat dull, sales in the September quarter have been subdued barring a couple of exceptions; the 11 per cent y-o-y fall in the aggregate revenues for 387 companies (excluding banks and financials) was driven inter alia by a 24 per cent y-o-y fall in the revenues at Reliance Industries, a 12 per cent y-o-y drop at Larsen & Toubro, a 66 per cent y-o-y decline at InterGlobe Aviation, and a 7 per cent y-o-y fall at Bajaj Auto.

Margins, therefore, are being eked out of sharp cuts in costs as companies conserve cash and save on everything, from promotional spends to staff. While benign input costs have no doubt helped – raw materials to sales were down a chunky 600 bps y-o-y – total expenditure fell a steep 21 per cent y-o-y.

For the sample, operating profit margins have increased by a whopping 11 percentage points y-o-y. A good example of this is TVS Motors. Though revenues rose just 6 per cent y-o-y during the quarter, the company reported strong operating margins of 9.3 per cent and a 13 per cent y-o-y increase in Ebitda due to falling other expenses, mainly promotion and marketing expenses. Staff costs also fell 8 per cent y-o-y as salary cuts had been initiated in Q2FY21. Nestle reported an Ebitda margin of 25 per cent, a near lifetime high on the back of higher gross margins and lower A&P spends;the company optimised costs but also gained from accounting changes. —FE