Earnings diagnosis of India Inc.

Tue, 22 Nov Pre-Open

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Earnings season for the September quarter has almost come to an end. And a general preliminary assessment of the results suggests that the current quarter was one of the most challenging one for India Inc. Revenues increased at snail pace (slowest growth in the last 7 quarters) while raw material price inflation impacted margins. In fact, net profits of the sample 2,100 companies under observation have declined by about 35% YoY due to rising interest costs and depreciation.

The sectors that were worst hit include automobiles, capital goods, metal and power. However, FMCG, pharma and select Information Technology (IT) companies were relatively resilient. Here we take a look at the performance of certain key sectors that were worst impacted and indicate how they will fare in the coming quarters.

Automobiles: High auto finance rates and increase in commodity prices marred the performance of auto companies. It is interesting to note that the demand dynamics in the festive season were not encouraging either indicating that the consumers are delaying their purchases. Further, certain company specific issues (example: labor unrest in case of Maruti and FCCB losses in case of Tata Motors) also impacted production and profitability. Thus, unless the interest rate environment and commodity prices stabilize the auto pack will continue to struggle in the near term.

Capital Goods: Execution issues, rising working capital requirements and raw material price inflation were the key concerns. Further, slowdown in investment cycle due to rising interest rates has impacted the order book and thus the future revenue visibility of these companies. Margin pressures have also magnified due to cost overruns while bureaucratic impediments acted as another roadblock. Going forward, over the next 2-3 quarters policy roadmap and interest rate environment will be the key areas to monitor.

Metals: Rising input cost, depreciating rupee and slowdown in demand plagued the metal sector during the current quarter. It may be noted that prices of coking coal and iron ore have increased substantially in the recent past. Inability to pass on the prices due to slowdown in real estate and infrastructure sector further deteriorated the margin profile. Even the aluminum producers were impacted due to lower prices (slowdown in demand). In the near term, the overall demand prospects are expected to remain lukewarm unless an amicable solution to the current infrastructure bottlenecks (key demand driver) is found.

Power: Fuel availability was the major area of concern. Coal shortages and natural gas scarcity impacted the output of power companies. Extended rainfall impacted Coal India's operations thereby further aggravating the feedstock concerns. As a result, majority of the power companies operated at lower capacity utilization. The situation is not likely to improve in the coming quarters unless fuel availability and environmental issues are resolved.