The Q2FY24 results from India Inc’s early birds suggest that while some sectors are chugging along nicely, there are quite a few pockets of pain. One clear takeaway is that revenues have not been easy to come by and it’s largely the softening of commodity prices and cost cutting measures that have helped companies protect their margins. The increase in net sales for a sample of 161 companies is just 7% y-o-y at a time when retail inflation is ruling at 5-5.5%.
While the delayed festive season is partly responsible for the subdued performance of retailers, the continuing trend of poor volume growth seen in the consumer staples business tells us purchasing power in rural India is weak.
TCS, for instance, saw a fall in the net headcount of about 6,300 sequentially in the September quarter. While companies are winning big deals—some of them even as large as a billion dollars—these don’t appear to be giving them enough confidence to strengthen their teams. Meanwhile, they are resorting to some serious cost cutting by pushing up utilisation rates, enhancing productivity and also trying to bring down the cost of resources.
Manufacturers of consumer-oriented goods and retailers are struggling to push through sales. The delayed festive season has undoubtedly played a part in the subdued numbers of players like Shoppers Stop, and to some extent, at Avenue Supermarts. However, the poor volume growth at firms like Hindustan Unilever points to some degree of downtrading probably due to the price inflation. Also, smaller brands, probably even local ones, seem to be taking away share from bigger players.
The good news is that cement manufacturers are doing well—an indication that the housing and construction sectors are generating demand. At Ultratech, for instance, volumes in Q2FY24 were up a strong 15% y-o-y. Prices of cement have risen over the past few months, a sign that demand continues to grow. The turnaround at JSW Steel, which swung to a profit, is encouraging even if it was lower costs, rather than a robust topline growth, that helped the steelmaker generate good operating profits. The topline growth at smaller companies like Havells too has been hurt by very soft demand and price erosion. In sectors like speciality chemicals there appears to be an oversupply created by China amidst weak global demand.
The results from the banking and financial services, which has been delighting investors over the past year, are mixed. On the face of it, the robust demand for credit has fetched lenders good yields even though the competition is intense and there has been a fair bit of undercutting. The worry though is less about margin compression and more about the quality of underwriting, a concern expressed by the regulator recently. Slippages at some of the smaller banks like Bandhan Bank and Indusind Bank are not to be taken lightly. ICICI Bank has turned in a super set of numbers with the net interest margin contracting by just 25 bps sequentially while HDFC Bank is coming is grappling with merger pangs.
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