Good show from India Inc

It’s been a very good earnings season so far with mostly surprises. Virutally every IT player has turned in stellar numbers and most companies catering for the home market too have reported a smart rebound in revenues driven both by better volumes and higher prices.

The strong order inflows at Larsen &Toubro (L&T) are encouraging though it would be too soon to call a turn in the capex cycle. Rising raw material costs benefitted producers; Vedanta reported the best profits in 11 quarters on better volumes and higher prices while the pick-up in local demand and sharp rise in prices helped JSW Steel post record steel margins.

With supply chains restored, consumption demand was reasonably strong through the festive and wedding seasons. Revenues at TVS Motors, for instance were up a smart 31% y-o-y, led by a 20% y-o-y increase in volumes and an 8.5% y-o-y increase in ASPs.

Again, volumes at Asian Paints jumped an astonishing 33% y-o-y, pushing up revenues by nearly 27% y-o-y on the back of both pent-up and festive demand. Sun Pharma’s sales rose 9.2% y-o-y, led by US market, which went up by 11% y-o-y.

At Ultratech volumes were up 14% y-o-y on the back of demand from rural and urban housing and government-led infrastructure. Despite an adverse base, Dabur notched up a volume growth of 18.1% y-o-y driving up sales by 16% y-o-y. Pidilite reported a 19.3% rise in consolidated sales.

For a sample of 444 companies (excluding banks and financials), revenues for Q3FY21 were down about 2% y-o-y but that’s because Reliance Industries reported a 22% y-o-y fall in sales. The combination of better revenues and contained costs resulted in a huge 500 bps expansion in operating profit margins(opm). At Tata Motors, the Indian business posted an expansion of 570 basis points in the opm. At Sun Pharma, ebitda margins expanded 550 bps y-o-y, partly on the back of a sharp 520 bps y-o-y drop in other expenditure. At Pidilite, gross margins expanded 100 bps y-o-y while ebitda margins expanded 380 bps y-o-y due to lower employee expenses and smaller other expenses.

The worst may be over but the road ahead might not be an easy one. Raw material costs are beginning to pinch. At Maruti Suzuki, for instance, the ebitda margin of 9.5% was below analysts estimates. At Hindustan Unilever (organic) gross margins were down a steep 220 bps y-o-y and operating margins were also weak as the FMCG major upped adspends.

With the restrictions being eased and business activity picking up demand should sustain but price hikes taken by many companies, to pass on input and other costs, could limit demand. Also rural demand which has been strong thus far supporting consumption could taper off as farm incomes moderate as is expected. Analysts are concerned that cost pressures could persist and that not too many companies may be able to pass on additional increases without hurting volumes. Also some of the cost cuts initiated at the start of the pandemic are being reversed.