Bottomline boosted by lower commodity prices
With earnings season drawing to a close, it is abundantly clear India Inc is nowhere close to a recovery. Most heavyweights have turned in numbers that did not meet even the modest estimates put out by analysts. Tata Steel, for instance, reported an ebitda R2,774 crore, lower by 35% y-o-y while Larsen & Toubro posted a 9% drop in ebitda, to R2,290 crore, and Adani Power reported a loss of R420 crore. If at all manufacturing firms have managed to make some money, it is thanks to the sharp fall in the prices of commodities which has helped them save on inputs; for a sample of 1,178 companies, raw material costs as a share of sales have fallen 420 basis points y-o-y. However, a glance at the net sales—down 1.8% y-o-y—is an indication of how companies are struggling to push through volumes and how they have all but lost pricing power.
Even after adjusting for softer commodity prices and lower inflation, the top-line numbers are far from impressive, and that is because demand isn’t really picking up—Hindustan Unilever, for instance, has been trimming prices. The corporate results pretty much endorse what the high frequency data has been telling us—namely, that there is not too much purchasing power either in rural markets or in urban India. Hero MotoCorp’s results bear testimony to this, as do its volumes for July which slid 8%. Factory output has been hovering in the region of 2-3% while the core sector too hasn’t done very much better growing at just around 3-4%. This is borne out by subdued volumes reported by cement-makers: ACC’s margins tumbled to a decade-low in the three months to June while Ultratech’s profits fell 6% y-o-y. As Crisil has pointed out, capacity utilisation is at a five-year low across most sectors and more pertinently, the levels are well below peak utilisation, so there is little incentive to add capacity. Which is why order books at firms like BHEL remain flat. In fact, with the construction and real estate sectors down in the dumps, it is hard to see demand reviving in the near-term; most real estate players have reported fewer launches in the April-June period even as inventories continue to pile up. This would mean muted demand for materials such as steel and cement as also for a host of other products. The other big worry for corporate India is that global recovery is stalling because this leaves the units catering for overseas markets vulnerable to lower levels of operations; at L&T, for instance, order inflows from the Middle East are slowing down. In sum, the slowdown in the economy doesn’t look like it is over even if some sectors, like commercial vehicles, may be bottoming out. Indeed, the chances of the kharif crop being a modest one, the result of an uneven monsoon, is likely to hurt farm incomes.