News Analysis

Why India Inc is selling more but profiting less

Anand Kalyanaraman BL Research Bureau | Updated on May 07, 2018 Published on May 06, 2018

Higher commodity prices and interest costs are a drag

Will rising commodity costs and higher interest rates trip India Inc’s fledgling earnings recovery? That seems to be a worry, going by the March 2018 quarter results reported by about 270 companies so far.

For the 180 or so manufacturing-based companies in this set, raw material costs rose at the fastest pace (nearly 19 per cent y-o-y) in four quarters. With pricing power not uniformly strong, the aggregate raw material cost of these companies as a percentage of their sales inched up to nearly 40 per cent, up from about 38 per cent in the June and September 2017 quarters.

Material impact

Despite an improvement in sales, several companies saw their bottomlines take a knock on account of rising material bills and fuel costs. For instance, despite strong growth in passenger traffic, IndiGo Airlines’ profit in the March quarter declined about 73 per cent y-o-y. This was primarily due to rising cost of aviation turbine fuel, which it could not pass on due to intense competition in the sector. Also, paint-maker Kansai Nerolac’s profit dipped 9 per cent despite revenue growing 17 per cent: the rise in cost of crude oil-based raw materials such as titanium dioxide was to blame for this.

Auto market leader Maruti Suzuki also saw profit grow at a slower pace (10 per cent) than sales growth (about 14 per cent) partly due to rising material costs. For the eight FMCG companies that have declared results, raw material costs as a percentage of sales increased to 57 per cent in the March quarter, higher than the 51-53 per cent in the prior three quarters.

Some companies, however, benefited from higher commodity prices. Mining and metal major Vedanta, for instance, saw its profit grow about 34 per cent y-o-y in the March quarter, faster than the 23 per cent increase in revenue. Yet, for India Inc as a whole, rising commodity costs are not good news.

Costlier loans

Interest costs also shot up during the period: the aggregate rose nearly 20 per cent y-o-y for about 220 entities excluding banks and finance companies. While higher borrowing to fund expansions would have increased financing costs (as in the case of the five-fold rise for Reliance Industries), rising rates would also have added to the expense. Agro-chemical companies such as UPL and cement majors such as UltraTech saw a sharp jump in their interest cost, which would also have weighed on their bottomlines.

Overall, revenue growth picked up pace, but profit growth slowed down. From about 11 per cent y-o-y in the June and September 2017 quarters and 13 per cent in the December quarter, revenue growth improved to 15 per cent for the 270-or-so companies that have declared their March quarter results so far. Higher volumes and the pass-through of a part of the rising costs both helped revenue growth. But profit growth for this set, which picked up from 4-7 per cent y-o-y in the June and September 2017 quarters to 16 per cent in the December quarter, fell back to about 11 per cent in the March quarter.

Sectoral performance

Among sectors, banks have been among the major laggards so far, with average profit decline of 18 per cent y-o-y in the March quarter. But this was primarily due to the big loss at Axis Bank on account of higher provisioning for bad loans.

Other private banks such as RBL Bank, YES Bank, Kotak Mahindra Bank, IndusInd Bank and HDFC Bank have done quite well, with profit growth in excess of 20 per cent. But how ICICI Bank, which has also struggled with bad loans, fares remains to be seen.

Also, the performance of the beleaguered PSU banks will be crucial to assess the sector’s health.

The airline sector seems to be in trouble, going by IndiGo Airlines’ dismal results, a reversal from the healthy earnings growth in the previous three quarters. Software companies posted flat profit growth overall, with good shows by players such as Mindtree and TCS offset by weak shows by companies such as Wipro.

The auto sector’s profit has grown 17 per cent, with strong 35 per cent earnings growth; in particular, Hero MotoCorp offset the slower 10 per cent growth at Maruti Suzuki.

The oil and gas sector so far has seen Reliance Industries post profit growth of 17 per cent y-o-y, which is healthy but is much lower than the 38 per cent sales growth. The company accounts for nearly a sixth of the March quarter profit declared by India Inc so far.

It may still be early in the quarterly earnings season, with many key results expected over the coming weeks. In addition, profit growth in the March 2018 quarter should be seen in the context of a low base effect: the March 2017 quarter was impacted by demonetisation.

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Published on May 06, 2018
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