Input costs weigh on India Inc as margin pressures hit commodity and cement producers in second quarter

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The September quarter earnings season has so far produced far more disappointments than surprises, making it a quiet start. The lackluster numbers – a 9% drop in year-over-year net profits for a sample of 226 companies – are the result of flat profits reported by Reliance Industries, a loss at JSW Steel, a strong profit decline at ACC by 120% yoy and at Ultratech by 45% yoy. Some smaller companies also reported low numbers or even recorded losses; at Havells, profits were down 38% year-on-year, while PVR posted both an operating loss and a net loss.

In fact, the sample’s revenue growth (which excludes BFSI) of 25.6% year-on-year is somewhat disappointing given a favorable base and inflationary environment. At Tata Consumer Products, own-source revenue increased by just over 7%.

The good news is that businesses that have been hit hard by the pandemic are bouncing back well. Shoppers Stop recorded a good recovery with revenue up 60% year-on-year, while Avenue Supermarts revenue increased 36% year-on-year, driven by a recovery in same-store and new-store sales. ITC’s consumer goods business performed well with revenue up 21% year-on-year.

While the IT package performed quite well, commodity and cement producers struggled with rising costs. Raw material costs per tonne at JSW Steel, for example, jumped around 70% year-on-year.

Margin pressures are evident everywhere. For a sample of 266 companies (excluding banks and financials), OPM contracted by 422 basis points year-on-year to 16.5%, leaving operating profit unchanged. RIL’s consolidated Ebitda margins declined nearly 200 basis points year-on-year. Even at much smaller companies – Rallis for example – margins have remained flat despite a 31% increase in revenue due to intense competition and high input costs. Gross margins at Hindustan Unilever contracted by around 580 basis points year-on-year in the quarter. At Shree Cement, margins fell to a seven-year low.

There hasn’t been much recovery in volumes at consumer-facing businesses. At Tata Consumer, volume growth was moderate in some segments and contracted in others. Volumes at Bajaj Auto remained virtually flat for the quarter. Underlying volume growth at HUL was 4% year-on-year.

Even in industrial products, volume growth was moderate; at ACC, volumes were up only 4% year-over-year. Analysts believe there has been a deceleration in volumes at Asian Paints, estimating the increase for the quarter at 10% year-on-year.

Some companies have managed to contain pressure on margins by raising prices; Asian Paints, for example, has taken a cumulative price increase of around 25% over the past six quarters in an attempt to combat commodity inflation of around 34%. Analysts believe that Nestlé’s 18.2% year-on-year rise in Q2FY23 revenue was the result of price increases of around 10-11% and volume growth of 7-8%.

Bajaj Auto’s net realizations increased by 17.5% year-on-year and the average domestic sales price increased by 10.6% year-on-year.

At the same time, intense competition and weak consumer demand in some industry segments hurt companies like Havells whose Ebitda margins collapsed by 600 basis points year-on-year. In addition, the disruption caused by the strong monsoon has hit construction companies; IRB Infrastructure’s revenues fell 8% year-on-year, leading to lower Ebitda.

While Infosys, TCS and HCLTech all reported reasonably good September quarter numbers, with HCL Tech beating the streets handsomely, Wipro’s September quarter earnings followed consensus and were disappointing. Management says the demand environment is quite robust and the slowdown has not yet had a significant impact on IT spending, nor is there a significant delay in conversions from contracts. They believe businesses will continue to spend on IT to become more efficient in these difficult times. EF

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