India Inc Q1 results off to a good start: Weak base, one-offs make numbers look better than they really are

While the headline numbers suggest earnings season has got off to a good start the headline numbers mask the favourable base effect, the many one-offs and several accounting changes. Nonetheless, corporate India has done reasonably well in the three months to June rebounding smartly — as the increased volumes show — from the weak Q1FY18 which was the pre-GST quarter.

None of the performances have been extraordinary but management commentary isn’t pessimistic, though it is cautious. That’s not surprising given the heightened competition in sectors such as telecom and two-wheelers and the virtual absence of the private sector in capacity addition. Also, raw material costs remain high and it’s not easy to pass these on to consumers at a time when demand is not so buoyant. Businesses in the commodity space are more confident as prices are expected to stay steady.

Larsen & Toubro’s margin expansion of 200 basis points y-o-y, as analysts have pointed out, must be viewed in the context of the low base and also some other factors; in fact margins for the key infrastructure segment fell 30 bps y-o-y in spite of better executions. While revenues were strong, adjusting for one-offs leaves the firm with a 26% y-o-y rise in reported net profits which is a shade below estimates. The good news is that order inflows jumped 37% y-o-y during the quarter though the order backlog at the end of June was higher by just 3%. And the ordering will continue to be dominated by the government sector because private companies aren’t spending too much on capex just yet.

BHEL’s Q1FY19 revenues were up just 8% y-o-y and below estimates since execution in the power segment wasn’t as good as expected; while the reported ebitda jumped 42% y-o-y the entire beat was thanks to lower-than-expected other expenses.

Else, a bigger raw materials bill and employee costs should have crimped margins. So while headline numbers look good — and in some instances have been propped by asset sales — a closer look reveals several pressure points; less-than-exciting consumer demand, huge competitive intensity both of which are robbing companies of pricing power as they gather volumes.

Chances of a price war breaking out in the low-end motorcycle segment, for instance, are expected to leave Bajaj Auto and Hero MotoCorp with crimped margins. In the June quarter, both companies disappointed the Street; Bajaj Auto’s operating profits were below estimates thanks to a slight deterioration in product mix and bigger discounts aimed at growing market share which it did. But the strong 39% year-on-year rise in bike volumes wasn’t enough to offset the significantly lower ASPs in the home market. Hero’s Q1FY19 revenues and blended realisation came in lower than estimates partly because it could no longer avail certain tax benefits. Ebitda margins were 40 bps lower as well, leading to only a 6% rise in ebitda as lower other expenses were more than offset by higher raw material costs, possibly due to elevated commodity price pressures. But the order-book grew 150% plus and the backlog by 15.6%.

Consumer spends are on the rise but aren’t as buoyant as one might have expected with cash now back in the economy and the pain of GST easing. But there is no doubt a fair degree of purchasing power with some sections of the population; Maruti Suzuki’s smart jump in revenues of 28% y-o-y was the result of a richer product mix and not just better volumes. However, Maruti’s ebitda missed estimates as other expenses were higher than expected. Asian Paints did well, partly helped by the low base with standalone volumes estimated to have jumped 13-14% y-o-y in Q1FY19. Ebitda margins soared 360 bps y-o-y as management kept a tight grip on staff and other costs but management commentary, nonetheless, was cautious on the potential impact of the cuts in GST rates.

It was a steady quarter from Hindustan Unilever — volumes were up about 12% but on a flattish base — and margins rose 100 basis points y-o-y after adjusting for GST; analysts believe the pick-up in demand is modest. “Given additional headwinds of rising input prices and rising competitive pressures, it would be difficult to maintain the pace of margin expansion, analysts at Jefferies wrote.

The continuing turnaround in the steel sector sent JSW Steel’s profits soaring by 95%.

Having restructured the business, Jubilant Foodworks reported a strong same-store-growth of 26% y-o-y in a sports-filled quarter; while the momentum will taper off as the base effect catches up. Some of the smaller infra companies such as IRB Infra are well-positioned to cash in on the government capex since they are not highly leveraged; IRB’s current order backlog provides a visibility of more than three years.

Dr Reddy’s did better than estimated with the formulations segment posting a 30% growth. Tata Power reported yet another sedate set of numbers; while the consolidated profits were boosted by higher prices of coal the generation locally was lower y-o-y.

UltraTech reported a good 31% y-o-y jump in revenues on the back of a 33% increase in volumes — the result of acquisitions — normalised volumes would have been 10%. Realisations fell y-o-y and the increase in costs meant the ebitda rose just 4% y-o-y.

The cost increase is due to a combination of higher raw-material, freight and fuel costs as well as weaker rupee/dollar rate—these cost drivers which make 65% of total costs are under pressure, analysts wrote.