With heavyweights Larsen & Toubro, Hindustan Unilever and ITC reporting numbers below analysts? estimates, earnings season so far has been a huge disappointment; although Reliance Industries Limited (RIL) reported a decent rise in profits, the Street was disappointed with the numbers since the bottom line was propped up by other income.
The only company that has beaten the Street convincingly, in the three months to June, 2013, is Tata Consultancy Services (TCS), which reported a 21% year-on-year jump in revenues. The manufacturing space, however, is bearing the brunt of the economic slowdown, as is clear from the sharp fall in revenues and loss reported by commercial vehicle manufacturer Ashok Leyland. Engineering major L&T?s sales rose a meagre 5% y-o-y ? falling 9% y-o-y in the home market. GAIL reported a 29% y-o-y drop in profits in Q1FY14 thanks to both the LPG and liquid hydrocarbon segments faring poorly.
In a difficult environment, India Inc?s top line is barely growing ? net sales for a sample of 313 companies (excluding banks and financials) have stayed flat rising just 1% year-on-year, the top line growth tapering off sharply over the past few quarters. Consequently, the bottom line has barely grown ? net profits have gone up by just 1.5% y-o-y compared with 17% y-o-y, 14% y-o-y and 19%y-o-y, in the previous three quarters.
Indeed, the consumer space too seems to be feeling the pressures of a sluggish economy ? HUL?s volumes were up just 4% as a result of which sales rose a subdued 7% y-o-y. At ITC too, net sales grew just 10.3% y-o-y, with cigarette volumes falling 2% y-o-y. Volumes are estimated to have been flat at Nestle with revenues in the home market up just 9% y-o-y and exports pulling up total sales. Volumes at Asian Paints are estimated to have grown at around 10% y-o-y, but off a very small base in Q1FY13 when volumes fell 3% y-o-y.
What?s worrying is that management commentary has bordered on the bleak; most companies sound despondent about the near term. The top team at Maruti Suzuki, for instance, cut its forecast for passenger car volumes this year to between 0% and 5% compared with 5-6% earlier ? retail volumes were flat in Q1FY14. Analysts too are convinced it could be a while before demand picks up.
?The company is trying all tricks to revive demand ? discounts were up R2,800 per vehicle q-o-q in Q1FY14 ? but recovery seems distant,? Kotak Institutional equities, wrote in a report.
?We estimate a 3% decline in volumes in FY2014 as the economy is unlikely to improve significantly,? the report added. Others like Bajaj Auto?s Rajiv Bajaj too believe it could be a while before there?s a meaningful recovery.
If margins are steady, it?s thanks to softening commodity prices ? raw materials as a share of sales for the sample fell 286 basis points y-o-y ? thanks to which operating profit margins expanded by about 30 basis points, to 15.66%. Many companies reported smaller operating profits ? Sterling saw a 6% y-o-y drop in Ebitda (earnings before interest, tax and depreciation), due to a fall in prices of zinc and lead and partly because its copper smelter in Tuticorin was shut. If gross margins at Maruti improved 245 basis points y-o-y, 150 basis points came from currency benefits. Ebitda margins at Thermax fell 40 basis points y-o-y with slower execution impacting the domestic business.
