Demand remains weak, expansion subdued
The 36% y-o-y jump in the net profits reported by a sample of 2,316 companies (excluding banks, financials and oil marketing companies) for the three months to June masks much of the stress within corporate India. While it is true several sectors have done well—IT and telecom for instance—the fact is aggregate demand remains weak, whether it is for consumer products or capital goods. While revenues have risen at a reasonably good 12% y-o-y, few companies have shown any pricing power and it is the savings in costs and a large other income component that has driven up profits. Indeed, the subdued increase in both depreciation and interest costs reflects how companies are shying away from expanding their businesses.
Firms whose fortunes are linked to domestic demand remain stressed partly because they are short of resources or because of regulatory changes; most companies in the core sector have turned in very ordinary numbers while those in the infra space continue to struggle; GMR Infra reported a shocking loss of R593 crore. So, while the manufacturing sector may have staged a revival with a 3.9% growth in Q1FY15 after falling by an average 0.7% in the six months to March 2014, the recovery in industrial production is at best a mild one, helped to some extent by the withdrawal of the mining ban. That there is no rush to add capacity is clear from the weak loan growth numbers reported by banks—SBI’s advances fell sequentially in the June quarter with the corporate book contracting while loans to companies at ICICI Bank were up just 8% y-o-y. The steady increase in the output of capital goods in Q1FY15, as reflected in the IIP, is at variance with the trend in the order books of capital goods companies which have been anaemic for several quarters now, even shrinking in some as in the case of BHEL. Order flows in the June quarter were at best modest; at L&T, wins from overseas markets compensated for the weak local inflows but at 11% y-o-y, the increase in the order book was below the management guidance of 15%. At smaller firms like Kalpataru and Thermax, orders fell sharply. In the consumer space, market leaders like Hindustan Unilever and Maruti succeeded in a challenging environment but for the most part, the weak spends showed up in the sluggish volumes and the lack of pricing power as downtrading increased; ITC’s FMCG business, for instance, decelerated, resulting in a marginal EBIT loss. To that extent, the 10% contraction in the production of consumer goods in May, isn’t really surprising. With the festive season coming up the trend may reverse but until the capex cycle turns any sustainable growth in demand is unlikely.