Early birds aren't flying PDF Print E-mail
Tuesday, 29 January 2019 04:17
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Shobhana edit

Despite very tempered expectations, the Street must be sorely disappointed with the first crop of results for the December quarter earnings season. To be fair, analysts had pencilled in some pressure on operating margins given raw material costs remain elevated and the impact of a softening in commodity prices comes through only with a lag. What they probably hadn’t bargained for was significant weakening in consumer demand—in the face of an increase in the prices of goods—and the inability to push through price increases. Maruti Suzuki’s five-year low operating profit margin was a shocker, but it is evident from the numbers of efficient retailers such as Avenue Supermarts that consumers are becoming price-conscious. Gross margins at Hindustan Unilever contracted 80 bps y-o-y, and if it managed to post good ebitda margins despite keen competition, it did so by reining in costs—employee costs declined 5% y-o-y while ad-spends were down 50 bps as a share of revenue. At TVS Motors, gross margins fell 310 bps y-o-y due to an increase in raw material costs.


The GDP data shows private consumption has been growing at a very sluggish pace for several quarters now, and anecdotal evidence suggests job creation has been slow, too. Indeed, a glance at Maruti’s sales numbers for Q3FY19 shows that growth in urban markets has been flat. While TVS Motors turned in a good performance and was able to take a price hike, analysts point out that, post the implementation of two-wheeler safety norms in April 2019, the company will find it difficult to increase prices and that would put pressure on margins. Costs and competition hit Avenue Supermarkets, where ebitda margins slipped 200 bps y-o-y even though revenues were up 33% y-o-y.

If one excludes RIL and TCS from a sample of 205 companies, the net profits are up only 0.25% y-o-y on the back of a growth in sales of 16% y-o-y. Even if one retains TCS and RIL, the growth in profits is just 6% y-o-y and that too with a jump in revenues of 29% y-o-y. To be sure, some consumer-facing companies have done well—Asian Paints, for instance. Larsen & Toubro reported very good numbers on the back of good execution. While a good part of the fall in order inflows—12% y-o-y in Q3FY19—can be attributed to quarterly skews, it is nonetheless true that there may not have been a fall had the private sector been investing more. The IT sector companies have done fairly well, though, with global growth likely to lose momentum—led by slowing growth in the US—there is a good chance of these companies reporting less-than-exciting numbers in 2019-20.


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