A mixed bag

Initial Q2 results show volume growth but margins under pressure

An analysis of 300 listed companies which have submitted their results for the July-September 2018 quarter shows growth in sales but increased pressure on margins. Raw material costs are up, and so is the cost of finance. It is important to note here that the introduction of the goods and services tax (GST) in July 2017 created unusual base effects. Net sales are up 24 per cent at Rs4.6 trillion over the corresponding quarter of 2017-18. Similarly, adjusted profit after tax has risen by 18 per cent to Rs 666 billion. Operating profits (that is, earnings before interest, tax, depreciation and amortisation, or EBITDA) are up 14 per cent to Rs1.7 trillion and interest costs are up 24 per cent, while total expenditure is up 26 per cent. The operating margin (that is, EBITDA as a percentage of net sales) has dropped to 29 per cent from 31.5 per cent. However, if one removes refining (Reliance Industries), banks (17 banks have reported their numbers) and non-banking financial companies or NBFCs (34 companies) from the sample, the results are less impressive. Net sales are up by a healthy 15 per cent, but expenditure is up 18 per cent, EBITDA is up a marginal 0.8 per cent, and adjusted profit is up just 9 per cent. The operating margin has dropped to 21 per cent from 24 per cent a year ago.

One big factor in these results has been the weakness in the rupee. The pharmaceutical industry has been a beneficiary, with sales going up 28 per cent, while adjusted profit after tax (PAT) has grown by 41 per cent and EBITDA margins have risen to 37 per cent from 34 per cent. The software sector’s performance has been less impressive. The 26 information technology (IT) companies included in the sample delivered 19 per cent sales growth with 15 per cent growth in profit after tax (PAT). The operating profit margin for the IT sector has fallen to 26 per cent from 27 per cent. TCS and Wipro have both seen a rise in the cost of financing. Textiles is another export-oriented industry that faced teething troubles after the GST’s introduction; the sector has seen a 42 per cent bounce in profits coupled with a 19 per cent rise in sales. But the automobile sector has been hurt by higher interest rates and higher raw material costs. Profits have declined for Maruti, Hero and TVS, and operating margins are down. The fast-moving consumer goods (FMCG) segment seems to have done well with Hindustan Unilever reporting 13 per cent sales growth and 22 per cent profit growth. Cement is also suffering margin erosion though demand seems fair.

The steel sector is hard to analyse. If the loss-making Monnet Ispat and Uttam Galva are excluded, the sector has done well. But SAIL and Tata Steel are yet to declare their results. The paints industry has been hit by rising costs as crude oil prices have risen but Hindustan Oil Exploration has seen an enormous expansion in sales and profits for that very reason. Banking is a mixed bag with many public sector banks (PSBs) yet to report their numbers. Credit growth is up by 19 per cent while interest costs are up 22 per cent. There's been a turnaround in Oriental Bank, but IDFC Bank is in trouble. The NBFC segment has seen a 27 per cent rise in credit disbursal, coupled with a 30 per cent rise in the cost of financing. The optic fibre industry has seen strong volume expansion and profit growth.

Overall, a larger sample is necessary before any definitive statements can be made. But it doesn't look as though India Inc has much cause to celebrate if this pattern of margin pressure holds, even though sales volume has clearly improved.