Corporate India Continues To Have Several Problems

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Corporate India continues to have several problems that are hurting earnings growth. Among the bigger headwinds is dull demand-made worse by demonetisation—high competitive intensity and rising raw material costs. Had the local economy been a little more robust and the global economy less lethargic, a business might have been a shade brisker. But even after three years of very modest earnings that provide a favorable base, profit numbers are far from exciting. With the commodity cycle having seemingly turned, metal producers are doing better—Hindustan Zinc put up a stellar show reporting its best ever quarter—and that is driving up aggregate sales numbers. In fact, steelmakers had done very well in the December quarter as well.

Excluding large commodity players such as Reliance Industries, the sales growth for the crop of companies that have already announced results in the March quarter is barely 5% y-o-y. Despite a good monsoon, volumes at two-wheeler players like HeroMotoCorp were subdued during the quarter, airline yields at Interglobe Aviation dropped 6% y-o-y and tariff realizations at JSW Energy were weak. Revenues at Dr. Reddy’s Labs fell 4% y-o-y while organic revenues at GCPL rose just 5% y-o-y, and at companies such as GSK Consumer, sales barely grew. Cement major Ultratech’s results—flat volumes and muted sales growth—are a good indication of how many core sector players are struggling to drive up revenues. At the same time, cost pressures are building up—at Ultratech, for instance, higher fuel and freight resulted in the earnings before interest, tax, depreciation, and amortization falling 7% y-o-y.

The higher cost of raw materials, especially steel, has hurt other companies such as Hero MotoCorp, where the raw material per unit rose quarter-on-quarter. Gross margins at Exide were down 180 bps y-o-y while, at Asian Paints, they contracted nearly 150 basis points y-o-y. However, companies have been able to cut spends on overheads, salaries, advertising and promotions and that has helped them grow profits, even if the increase has been a modest one. While the impact of demonetization lingered on in January, February and March appear to have been much better as reflected in the uptick in volumes in some sectors; paints, for example, reported a double-digit growth in Q4FY17. One factor that could hurt consumer demand, even if it is a short-term impact, is IT companies laying off hundreds of employees. As for IT firms themselves, the next couple of years appear challenging; so, earnings growth could be slow. However, a good monsoon, fatter pay packets for government employees, especially with allowances being paid out, and a jump in spends on the infrastructure sector should all combine to drive up demand.

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Video Credits: NDTV

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Myself Amartya Datta, I'm currently 21 years old, living in Kolkata. I'm a Journalism & Mass Communication graduate and have a specialization on VFX and Graphic Designing.

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