Q2 Earnings: India Inc registers weak sales but profits up on lower costs

India Inc’s good headline numbers for the September quarter are the result of strong rural demand, some price gains, huge savings and the stellar comeback by IT majors. Aggregate revenues are weak but steep cost cuts have helped companies protect their margins. However, companies remain cautious waiting to see whether the spurt in consumption — much of it the result of pent-up demand and purchases for the festive and wedding seasons sustains beyond December.

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Without a meaningful increases in revenues, it might be difficult for companies to expand operating margins further since purchasing power in urban demand appears to be somewhat muted. At Maruti Suzuki, for example, rural retail volumes grew by 10% y-o-y while urban and semi urban demand was flat y-o-y.

The good news is that the four tech majors are adding to their headcount and that market — for both white and blue collar jobs — is looking up and there seems to be a revival.

Rural consumption should remain reasonably good since the government continues to spend on infrastructure and affordable housing. Moreover, the good monsoon should result in a strong kharif output.

The subdued growth in aggregate revenues in the September quarter — a fall of 8.27% y-o-y for 805 companies — stems from a sharp fall reported by some large players and only small increases for others; a 24% y-o-y fall in the revenues at Reliance Industries, a 12% y-o-y drop at Larsen & Toubro, a 65% y-o-y drop at Shoppers Stop and a 66% y-o-y decline at Interglobe Aviation. HUL’s organic volumes increased by just 1% y-o-y in the quarter and revenues by just 3% y-o-y. ACC ‘s volumes, were up 1% y-o-y, leaving revenues flat. Although net selling prices at Bajaj Auto were up 5% y-o-y, revenues fell 7% y-o-y thanks to a 10% y-o-y drop in volumes. The good performances came from Asian Paints which reported a stellar 11% increase in volumes that drove up revenues 6% y-o-y. Again, Britannia Industries posted a revenue growth of 12.1% y-o-y, on the back of robust volumes increases at 9% y-o-y.

The improvement in operating margins is the result of good housekeeping and efforts to conserve cash, essentially steep cuts in cost save on everything from promotional spends to staff. While benign input costs have no doubt helped — raw materials to sales were down a chunky 500 bps y-o-y — total expenditure fell a steep 17% y-o-y. For the sample, operating profit margins have increased by a whopping nine percentage points y-o-y. At TVS Motors, for instance, operating margins were a high 9.3% as other expenses mainly promotion and marketing costs were reined in. Nestle reported an Ebitda margin of 25%, a near life-time high on the back of higher gross margins, and lower A&P spends. Ultratech’s India Ebitda soared 40% y-o-y on good volumes and lower costs which fell 7% y-o-y, from savings on energy and other expenses.

Some businesses could take longer to recover. Makers of commercial vehicles continued to fare poorly in Q2FY21; Tata Motors volumes for commercial vehicles crashed 29% y-o-y while the increase in the average selling price was just 1% y-o-y. Some companies, such as JSW Steel, reported strong volumes which jumped 14% y-o-y but realisations dipped slightly by 2% y-o-y. Asian Paints stunned the Street with an 11% increase in volumes that drove up revenues 6% y-o-y. The highlight of earnings season is undoubtedly the sharp magnitude of the recovery in IT. Both Infosys and TCS were able to grow revenues and margins smartly and also win deals; Infosys has upped its revenue and margin forecasts for the year.