Net profits fall 6.6% and the R is only adding to pressure
The key takeaways from the March 2012 earnings season, which is coming to an end, is that there?s going to be more pain for India Inc going ahead. For one, the capex cycle is yet to turn, as the orderbooks with engineering firms show. Moreover, companies are losing pricing power and will not be able to grow volumes meaningfully in an environment where inflation remains high. For a sample of 1,749 companies (excluding banks and financials), net profits are down 6.6% y-o-y, not surprising since the top line has grown just 14% y-o-y, way below the 20% y-o-y levels seen in the previous three quarters. Moreover, input costs remain high; the ratio of raw materials-to-sales rose 130 bps y-o-y, leaving operating profit margins lower by 230 bps. Indeed, the fall in profits would have been steeper had it not been for the fairly sharp increase in other income and also the lower effective tax rate in several instances. The Street would have played down the weak numbers, had management commentary been bullish. But save a few, like TCS, most companies have stayed with subdued guidance. The big blow has been the weak order inflows: engineering major L&T missed its order guidance of R80,000-84,000 crore for 2011-12, managing just R70,574 crore. Smaller companies too are in trouble: Siemens, for example, reported very dull inflows of R1,807 crore, down about 45% y-o-y and 36% q-o-q in the March quarter. Analysts believe the power sector?s troubles are here to stay and would limit the growth for companies such as BHEL.
But it?s not just the power sector, the weak economy is taking a toll on almost all sectors. Infrastructure companies like Concor have seen their business shrink with the lower growth in exports and imports; the firm?s domestic profitability has been hit by some 400 basis points. At TVS, revenues remained flat while operating profit margins were impacted because it?s unable to earn the kind of realisations that it needs to. And retailers have done very little business?the increase in same-store sales for the value segment at Pantaloon was just 2.66% y-o-y while for the lifestyle segment is was 3.5% y-o-y. Large FMCG players like ITC turned in disappointing numbers. Weak cash flows will be a cause for concern at banks already struggling with restructurings and non-performing assets. Cash flows at a firm like Jet Airways could be further stressed with the airline having reported a massive loss of R354 crore. At Tata Power, the stand-alone operating profit came in lower than expected, thanks to higher overheads and lower merchant realisations, while the company?s net profits were boosted by higher other income and a lower effective tax rate. The weak global demand environment continues to hurt firms with foreign subsidiaries. Novelis? numbers were disappointing with the adjusted ebitda coming in at the lower end of the guidance. Looks like corporates are in for a gruelling year.
