Earnings a tad better, but the outlook is poor
With Reliance Industries posting strong refining margins and TCS and ITC outdoing themselves, there?s suddenly more cheer to the September earnings season. For a sample of nearly 150 companies (excluding banks and financials), net sales are up 17.6%
y-o-y, much like in the June quarter. The good news is that softer prices of commodities and a better control on expenses are showing up in the better operating profit margins?OPMs fell just 170 basis points y-o-y compared with a fall of 290 basis points in the June quarter and at 15.4% they are higher than in June. Moreover, the interest bill is smaller?probably due to better inventory management?leaving net profits higher by 15% y-o-y compared with just 3% in the June quarter.
Is it too early to celebrate? Yes, because while the numbers for September may seem reasonably good, the outlook doesn?t. To begin with, Infosys lowered its topline estimates for the year. A closer look at the results of Ambuja Cements reveals that volumes have been flat y-o-y and it is a 21% y-o-y rise in realisations/tonne that has driven up sales. The demand outlook for cement is at best hazy and for prices to sustain, cement companies would need to control production. That doesn?t sound like an economy that?s raring to go. Moreover, while prices of raw materials have softened, the lack of topline growth is a problem?ACC, in fact, missed estimates on higher than expected cost pressures and Rallis too wasn?t able to pass on raw material costs in its chemicals business, forcing analysts to lower earnings estimates. There?s also the issue of weakening global demand; the petrochemicals cycle, for instance, could take longer to turn than earlier anticipated and that could hurt companies like RIL. There?s also concern that refining margins may not hold up with the slowdown in China. Much of India Inc remains highly leveraged?Adani Power?s interest costs have trebled during the September quarter and it may well stay in the red this year as high fuel costs continue to hurt. Smaller firms continue to feel the pinch?Exide, for instance, saw its margins contract sharply due to higher lead prices. Some evidence of bigger order books at capital goods companies would be encouraging as would pricing power for consumer goods firms. Even in the midst of the downturn, the private sector banks seem to be finding their niches; HDFC Bank?s results were remarkably consistent but even others like Axis Bank and IndusInd Bank have shown there are opportunities to be exploited.
