Despite the turnaround in the commodities space, which has seen metals producers swing from losses to profits, India Inc’s performance in the March quarter has been less than ordinary. That’s despite a favourable base effect — Q4FY17 was the first full quarter post-demonetisation. At 13.6%, the operating profit margin for a sample of 1,528 companies was the lowest in at least eight quarters; in Q4FY18, the OPM contracted by 114 basis points.
Excluding other income, the net profits for the sample actually fell 2.6% y-o-y compared with an increase of 24% y-o-y in Q3FY18. “The Q4FY18 results were generally below expectations and have resulted in moderate downgrades to FY19 and FY20 net profit estimates,” Sanjeev Prasad, managing director, Kotak Institutional Equities wrote, adding the Q4 net profit for the Nifty 50 Index fell 9% y-o-y.
Topline growth has been just about satisfactory suggesting not too many companies have been able to push through big volumes and few have been able to take price increases to pass on the rising input costs. Consequently, profitability has suffered except whether companies have been able to eke out operational efficiencies. For the automobile, cement and pharmaceutical sectors, either realisations or profitability or both were weaker than expected, KIE observed.
Better consumer spends —private final consumption expenditure rose 6.7% y-o-y — helped push up sales of durables and staples as reflected in the volumes for cars, two-wheelers and household products. There is evidence of a pick-up in demand in rural India and managements such as the one at Hero MotoCorp, which sells a very large share of its wheelers in the rural markets, is confident volumes will see a double-digit rise in 2018-19. Mahindra &Mahindra (M&M) reported very strong sales of tractors during the quarter and was even able to take a price increase for some brands.
The low base of 2017-18 will support a sharper increase in corporate profits in 2018-19 with a weaker currency supporting export earnings and improving profitability for commodity players as they leverage scale. With the effects of demonetisation and GST waning and digitsation picking up, the demand for consumer goods too should be robust. Ahead of the elections, the government is expected to spend on rural schemes and compensate farmers in the event they are unable to get a good price for their crops.
Analysts expect the government to roll out infrastructure and housing projects but prices of cement could remain subdued given the abundant capacity. The good news is that the capex cycle may be bottoming out, though it is too soon to call a decisive upturn. While it is true Larsen & Toubro wrote off a big chunk of slow-moving orders in FY18, consequently lowering the engineering firm’s order backlog, the management’s guidance of a 10-12% increase in orders in FY19, is encouraging. To be sure, much of the capex is still driven by government. The L&T management noted there were nascent signs of a recovery in private corporate capex but believes a meaningful uptick is about two years away. The modest base notwithstanding, BHEL’s orders in FY18 were up more than 70%.
However, the power sector continues to do poorly, thanks to the lack of affordable fuel. Plants that use imported coal are in trouble with the price of the fuel having shot up. Adani Power’s large losses stemmed partly from commercial shutdowns at its Mundra unit that is now unviable. JSW Energy reported a fall in revenues because it generated less power and realisations were weaker. The government’s continuing spends on infrastructure will keep the economy going as will a good monsoon. But, a break-out growth level—and better corporate earnings—will require private sector capex to come back. So far, there are no signs of this happening in the near future.