News Analysis

India Inc earnings take a knock in Q3

Parvatha Vardhini C BL Research Bureau | Updated on February 17, 2019 Published on February 17, 2019

Higher raw material prices, interest costs dent operating margins

India Inc has taken it on the chin in the quarter ended December 2018, with adjusted profits recording a 3.2 per cent fall over the three months ended December 2017 (year-on-year). Iffy demand in some pockets, the lag effect of high commodity prices and higher interest costs dented profit growth. This is the worst performance so far in 2018-19. Adjusted profits grew by a healthy 23.3 per cent year-on-year in September 2018 quarter and by 35.8 per cent in the April –June 2018 period.

About 2,800 listed companies, excluding banking and finance companies, were considered for this analysis. Consolidated figures are taken wherever applicable.

Weak operating performance

Profits have dropped despite robust net sales growth of 18.5 per cent recorded by these companies. This double-digit topline growth has not carried through to the bottom line due to roadblocks at the operating level. Higher raw material costs is among the key reasons. True, crude oil prices, which peaked at $86 a barrel in early October 2018, cooled off by about 35 per cent to around $55 a barrel by the end of the calendar year. Also, international prices of metals such as aluminium too eased while that of lead, natural rubber and zinc remained range-bound. But the lag effect of higher prices in the earlier months, impacted companies.

Raw material cost as a percentage of sales for listed companies came in at 57.5 per cent vs 54.4 per cent in the December 2017 quarter. Some companies could maintain or expand their operating profit margins by passing on some of the impact through price increases or cost control. Take Hindustan Unilever for instance. Raw material, as a percentage of sales, stood at 48.4 per cent now as against 47.5 per cent a year ago. But the company was able to expand its margins by 190 basis points year-on-year by partially passing on the increases and reigning in advertising spends. Ad expenses, as a percentage of sales, came in at 12.6 per cent in the quarter as against 13.3 per cent a year ago.

But many were not lucky. Despite a cumulative price increase of about 4 per cent taken during the quarter, Asian Paints, whose raw material is derived from crude oil, saw its operating margins coming down to 19.7 per cent, from 20.9 per cent in the December 2017 quarter. Almost all tyre companies saw margins shrink.

Overall operating margins for listed companies came in at 11.8 per cent for the October-December 2018 period, about 300 basis points lower than the same period a year ago.

Other headwinds

Outside the operating level, earnings were further dented by a rise in interest costs and a fall in ‘other income’.

This apart, the December 2018 quarter did not enjoy the tailwinds of the prior quarters. The June and September 2018 quarters had the advantage of a lower base in the respective quarters in 2017-18. The disruption due to the move to GST on July 1, 2017 had dented corporate performance in the first one or two quarters of last fiscal. Secondly, although overall net sales growth came in at 18.5 per cent in the latest quarter supported by sectors such as software, pharma and FMCG, growth slowed in quite a few pockets. Considering that cars, trucks and two-wheelers are typically leveraged buys, lack of adequate financing due to liquidity issues faced by NBFCs during the quarter dented automobile sales.

Top-line growth for automobile manufacturers came in at just 6.1 per cent. Sugar and fertilisers were other sectors that saw insipid sales. Commodity producers, especially in the non-ferrous space, also saw weak top-line growth, given the fall in prices. With pressures at the operating level, profit growth for all these sectors took a knock.

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