India Inc laid low by slowing demand, lack of pricing power

Earnings growth continues to be weak for India Inc in the quarter ended June 2019, though the optical improvement in earnings of banks is providing a heft to the overall numbers.

On first look, adjusted profit growth (year–on-year) for about 750 companies that have declared their results so far stands at a healthy 22.4 per cent for the April-June 2019 period. But a closer read reveals that this number has been majorly supported by the return to profitability of many banks such as State Bank of India, Punjab National Bank and ICICI Bank during the June 2019 quarter, as against losses recorded in the June 2018 quarter. Besides, the high growth in profits from a low base for some banks such as Axis Bank and the narrowing of losses at some others have propped up the numbers, though elevated slippages, huge bad loans, large stressed book and low recoveries remain a concern for many banks.

Also, the picture becomes bleak once banking and finance companies are taken out, with adjusted profits dropping by 6.6 per cent for the rest of the companies (numbering around 650). This is the third successive quarter of drop in adjusted profits in the last one year for these entities.

Demand contracts

A slowdown in demand is among the key reasons for the muted performance. In the three months ended June, overall topline growth has come in at just eight per cent. Demand has been progressively declining in the last four quarters — sales grew at 23.6 per cent in the quarter ended September 2018 for 650 companies and has gradually tapered down to single digits now. Consumption sectors such as automobiles and related suppliers have borne the brunt of the slowdown.

Automobile sales volumes declined by 12.4 per cent in the April-June 2019 period. Consequently, the topline of automobile, auto ancillary, castings and forgings sectors has declined by 4 -10 per cent. Fertilisers, non-ferrous metals and steel sectors also saw a decline in sales. Most major FMCG companies clocked single-digit growth in sales due to poor volumes. IT revenues slowed too with growth coming in at just 10.7 per cent in the first quarter. Revenues of these companies grew by 16-19 per cent in the three preceding quarters. While prices of some raw materials such as lead and palm oil were benign in comparison with the same period last year, prices of other inputs such as crude oil remained somewhat flat. Raw material cost as a percentage of sales came in somewhat flat at 52.1 per cent, compared with 51.9 per cent in the April-June 2018 period.

Margins shrink

Besides, lack of pricing power and discounts due to weak demand hurt margins. Overall operating margins came in at 15.6 per cent, as against 16.2 per cent a year ago. Companies which reined in costs saw an expansion in margins though. Most FMCG companies such as Dabur, Godrej Consumer, Hindustan Unilever and GSK Consumer brought down advertising spends to control costs. Advertising expenses as a percentage of sales for Hindustan Unilever, for instance, stood at 11.6 per cent in the quarter, down from 12.3 per cent a year ago.

Below the operating level, a 13 per cent fall in other income and higher growth in interest and depreciation costs ate into profits. Interest cover for companies too came down to 3.4 times, as against 4.8 times a year ago and 3.9 times in the March 2019 quarter.

With nothing much changing on the ground so far this quarter and global growth too turning weak, India Inc may continue to report lacklustre numbers in the September quarter.

A sharp cut in lending rates by the RBI in its upcoming monetary policy this week could help boost sentiment and credit offtake.

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