IOC's worst quarter makes the IIP look good
On Wednesday, telecom leader Bharti Airtel declared the worst quarterly results in its history; on Thursday, India’s top oil marketing firm declared the highest-ever losses in its history. If Indian Oil Corporation’s R22,450 crore losses were mind-numbing, Hindustan Petroleum was relatively better with a R9,250 crore loss (IOC’s losses were 23% of revenue, HPCL’s were 21%). ONGC is expected to turn in a profit on Saturday, with its average realisations at $47 a barrel (it gives $63 of discounts to lower the losses of the likes of IOC and HPCL!), but its chief Sudhir Vasudeva is on record saying he can’t fund his capex needs unless he gets realisations of $55 a barrel. While declaring below-par results on Thursday, leading commercial vehicles (CV) manufacturer Tata Motors reported a 2% fall in volumes in the June quarter as against an 18.2% rise in the same quarter last year. Given the lead-indicator status of CVs, what’s worrying is that while April-June sales of medium & heavy CVs fell 12% for the industry as a whole, they fell 12.75% in April-July. All CVs, which include LCVs, rose just 4.7% in April-July FY13 versus 16.6% in April-July FY12. Not surprisingly then, according to a Barclays Equity Research analysis, while FY13 earnings were projected to rise 14.2%, this is now likely to be lower by 89 bps—and this analysis doesn’t take into account the IOC and HPCL disaster, nor the likely ONGC one. And within this, Barclays expects the sharpest earnings fall in telecom (earnings estimates are likely to be pared 439 bps), followed by utilities (paring by 346 bps) and industrials (paring by 234 bps).
While the IIP contraction of 1.8% in June doesn’t look as bad when seen in the context of the results so far, what’s interesting is what’s behind the IIP numbers. Capital goods contracted even more sharply in June, to 27.9% or thrice that in May, and the real shocker was the 1% contraction in consumer non-durables. After rising 10.6% in January, growth in consumer non-durables has been falling steadily, to 0.3% in May, but this is the first month of a negative growth. In which case, it’s likely we haven’t seen the end of downgrade season. On Tuesday, Citi Research said it was looking at a 5.4% GDP growth (its earlier estimate was 6.4%), but with the IIP numbers coming in on Thursday, Citi said the risks of a sub-5% Q1 GDP had risen. While ratings agency Crisil lowered its FY13 forecast from 6.5% earlier to 5.5% now, others who’ve lowered their forecasts include CLSA and even ratings firm Moody’s. With drought spending likely to rise and tax revenues likely to collapse with growth worsening, the deficit will exceed the budget estimate by 1-1.5 ppt. Corporate debt restructuring (CDR), which rose 35% to R1.5 lakh crore in FY12, is also rising—R19,000 crore loans were referred to the CDR cell in the June quarter, up from R14,500 crore in the March quarter. In other words, if the government doesn’t move very quickly on policy measures, India’s in deep trouble.