The earnings season so far has been by and large disappointing with most heavyweights not living up to expectations —TCS, Wipro, ITC and Idea Cellular have all turned in numbers that were below estimates — and just a couple of strong performances from Infosys and Reliance Industries. A sluggish economy, in which there is very little investment taking place and unutilised capacity remains high, has virtually killed the demand for capital goods. This, together with weak rural demand and intense competition in some sectors, have combined to keep corporate profits under pressure.
For a sample of 145 companies (excluding banks and financials), net sales fell by about 6% year-on-year, the impact of the continuing downtrend in commodity prices. With expenses coming off by almost 10% — again the result of lower input costs — operating margins jumped a sharp 308 basis points, much like it happened in the September and June quarters. Net profits were up by just under 6%, a disappointing number.
Although HUL managed to clock volumes of 6% for the fourth consecutive quarter, its clear there’s isn’t too much purchasing power with consumers, which is why revenues rose an anaemic 3% year-on-year. FMCG firms are being compelled to spend heavily on advertising to drive sales. However, unless rural incomes rise, pushing through larger volumes will be difficult. At UltraTech Cement, realisations fell 2% year-on-year but the company sold higher volumes of cement, up 7% y-o-y, which was higher than the industry average of 4.5%. Idea cellular missed both top line and bottom line estimates. Analysts point out the keen competitive intensity is hurting telcos keeping a lid on realisations and pushing up higher costs of subscriber acquisition. Moreover, the additional capex on account of the growing 3G and 4G networks, in the absence of any meaningful uptick in data volumes, is adding to costs.
While firms such as JSW Energy have gained enormously from falling prices of imported coal, they may have to give up some of these gains to the depreciation of the rupee. Falling prices of zinc — down 28% y-o-y — drove down Ebitda by 29% y-o-y at Hindustan Zinc. At Reliance Infrastructure, profits grew just 2% y-o-y, partly due to a lower effective tax rate and a provision write-back for the EPC business.
Smaller firms too haven’t done well. At Exide, for instance, sales fell 2% y-o-y with demand remaining weak in the automotive OEM and most industrial battery segments. Rallis reported a 20% y-o-y fall in consolidated sales and consolidated profits thanks to poor exports and adverse currency payments.
That the economy remains under stress is evident from the results of banks and financial players. At Mahindra & Mahindra Financial Services, for instance, profits plummetted 50% year-on-year while asset quality deteriorated with gross non-performing assets (NPAs) crossing 10%. Axis Bank recognised higher npas, in line with the Reserve Bank of India review, and has guided stress would continue.