First crop of earnings suggest broader recovery
To be sure it’s early days yet, but the first crop of corporate earnings for the three months to March appears to suggest a broad-based recovery. For a clutch of 133 companies (excluding banks, financials, Cairn & Vedanta), revenues in Q4FY16 have risen 4 % y-o-y. While this may appear subdued compared with the 10-12% clocked a couple of years back, the number must be read in the context of current disinflationary environment. Companies had not just lost pricing power—Hindustan Unilever and Asian Paints for example have taken price cuts to ensure they are able to retain market share—many were not able to push through volumes. Which is why it is encouraging that volumes are rising across sectors—Ultratech Cement for instance, reported a volume increase of a smart 15% y-o-y, while at Ambuja Cements these were up 10% y-o-y and at ACC 9% y-o-y. At smaller firms such as Marico too volumes were strong at 10.5% y-o-y, the highest in the last 14 quarters while at Dabur they were up 7%. The volume increases may be coming off a low base but it nevertheless indicates a pick-up in demand. In some instances, consolidation in the industry has helped; telecom operator Bharti Airtel’s domestic voice traffic grew a smart 11% y-o-y, the highest in 18 quarters. The higher volumes together with benign commodity prices have resulted in better operating leverage; the operating margin for the sample, was up 300 basis points y-o-y thanks to a drop in the raw materials bill down 470 basis points as a share of sales. Moreover, net profits have gone up by 22.3% y-o-y without too much support from other income.
One reason for the good performance is the return of pricing power at least to some players. At Maruti, for instance, the average selling price rose 8.2% y-o-y driving up revenues by 12.3%. It would appear therefore that larger and better-run manufacturing and services firms are coming out of the slump. Unfortunately, however, a couple of the larger private sector banks fared poorly since they needed to provide for loan losses. ICICI Bank made provisions of R6,926 crore , a five-fold increase, which includes contingent provisions for anticipated slippages in the current year. Moreover, the lender disclosed that approximately R44,100 crore of loans or 4.8% of the total exposure, across sectors, is rated below investment grade internally. The provisions together with the deteriorating asset quality—gross non-performing assets rose to 5.8% while net NPAs rose to 3%—indicate there is a fairly big part of corporate India that remains over-leveraged and it’s possible some of these financially-stretched may not remain solvent for too long. The wealth destroyed by these firms will reflect in job losses which, in turn, will tell on consumption demand and cannot be good news. In the meanwhile, a good monsoon should help alleviate the stress in rural India where wages have been relatively flat following two weak monsoons. For makers of consumer durables and staples higher rural incomes could be just the tailwind they need.