The overall corporate performance was adversely affected by the performance of Banks. Banks together reported net loss of Rs.116.69 billion in Q4FY16 as against a net profit of Rs.187.22 billion in Q4FY15. This dramatic reversal in profitability was mainly influenced by Rs.223.48 billion of losses of PSU banks in Q4FY16. With exclusion of banks the net profit was up 25% with 2% growth in sales for the overall corporate sector compared with the last year same quarter.
There are various sectors that have reported rise in profitability on a year on year basis while others have posted a fall in the net profit figures. Sectors that have reported profit in Q4FY16 as compared to losses in Q4FY15 include airlines, trading, telecommunication equipment, sugar, glass & glass products, food processing and Light and Heavy Commercial Vehicle segment of the Auto sector. Sectors that have reported a sharp rise in profit include cables-power, moulded luggage, fasteners, steel, breweries & distilleries, pharmaceuticals and textiles. PSU banking, construction, diamond/jewellery, electrodes-graphites, consumer electronics, paper, solvent extraction, steel posted losses in Q4FY16 as compared to a profit in Q4FY15. Sectors that have reported a sharp fall in profit consisted of shipping, tea, computers-hardware and telecommunication service providers.
We covered quarterly results for sectors such as Auto, Information Technology, Banks, Aviation and FMCG in the previous reports. We will have a look at other sector results such as Cement, Capital Goods and Auto Ancillary for Q4FY16.
Net profit of 32 major cement companies increased 8% to Rs.20.04 billion with a revenue growth of 4% to Rs.229.24 billion in Q4FY16 over Q4FY15. The operating profit margins (OPM) reduced 50 basis points (bps) to 17.6% as benefit of higher sales volume and low costs were set off by weak cement realization.
As a percentage of sales, freight costs, other expenses, and employee benefit costs increased and were more than offset by reduction in power and fuel costs.
Net profit of north Indian cement players, which consist of 20 listed entities, accounting for 84% of the aggregate profit rose 11% to Rs.16.89 billion with a 4% growth in revenues to Rs.194.42 billion. South Indian players which are 12 listed entities accounting for 16% of the aggregate profit posted a 4% drop in net profit to Rs.3.16 billion despite revenues growing by 6% to Rs.34.81 billion due to higher depreciation and tax expense. The weak prices resulted in the OPM of south Indian players declining 90 bps to 22.3% and north Indian players’ OPM dipping 40 bps to 16.7% over the year.
Revenues of India’s biggest cement maker Ultratech rose 5% to Rs.69.20 billion due to improved sales volume partially offset by drop in realization.
The Indian cement sector’s earnings grew at a relatively better pace in Q4FY16 over Q4FY15 boosted by robust volume growth but partially offset by weak realization per tonne. The construction of roads, highways, tunnels and bridges witnessed an uptick which saw the demand for cement registering a perceptible increase compared with the slow pace witnessed in the previous year.
Recovery in the demand for cement was visible in the north and east due to large infrastructure projects getting started, while higher cement demand from Andhra Pradesh and Telangana also supported volume growth. Domestic cement production, as reported by the Office of Economic Advisor, the Ministry of Commerce and Industry, grew 11.4% to 78 million tonnes (mt) in Q4FY16 over Q4FY15. Volumes had fallen 0.4% in Q4FY15 over Q4FY14.
Pricing pressure across regions led to decline in realization for cement companies. The all-India average cement price was down by 4% over the year and lower by 3% over previous quarter at Rs.305 per 50 kg bag in Q4FY16. The decline was led by the western region (down 14%), followed by the eastern region (down 7%) and the central region (down 2%). Prices in the southern region remained flat, led by production discipline while the north-east region saw an improvement of 2%.
The domestic cement sector is likely to witness improvement in demand due to pick up in infrastructure and housing projects backed by the government and an expected favourable monsoon this fiscal year. Some of the biggest cement companies in India expect demand to grow about 6-8% in the current financial year (FY 2017). Overall cement demand in the calendar year 2016 is estimated to grow at a rate faster than the preceding year if supported by a faster pace of infrastructure development, housing and industrial growth. With signs of slowdown in pace of capacity additions in the coming years and with the expected rise in demand, there is room for growth in the cement sector. Also, with forecast of a good monsoon, cement demand tends to rise in the rural and semi urban regions, with a four to six months’ lag. After the monsoon and harvest seasons during the festive months, construction activity enters a peak phase from November till May every year.
The demand for capital goods is correlated to capital expenditure in the infrastructure and the industrial sectors. Execution of infra projects is caught in various issues ranging from land, approval and funds. Industrial capex is also muted, with excess capacity across all industries, barring a few. Given this climate, the strong investment push by the Central and state governments in infrastructure segments such as transportation, power T&D, smart cities, buildings and water projects are facilitating order flow and order book burnout and providing growth momentum.
The order finalized by Power Grid Corporation of India (PGCIL), the central transmission utility, was down 17.5% to Rs.166.87 billion in the fiscal ended March 2016 (FY 2016). However, the order finalized by PGCIL in April and May 2016 was higher by 11.7% to Rs.40.37 billion. Orders received by Bharat Heavy Electricals (BHEL) rose 42% to Rs.437.27 billion. The traction in order intake was largely due to strong order finalization by state and Central utilities.
The order intake of Larsen & Toubro (L&T) group dipped 11.9% to Rs.1368.58 billion as it deducted slow moving orders worth over Rs.150 billion from its order book and loss of bids in the power sector and continued slowdown in metals and heavy engineering orders. While the domestic order inflow slipped 20% to Rs.929.02 billion, the flow of international orders was up 12.4% to Rs.439.56 billion in FY 2016.
The aggregate revenue of the constituents of the BSE Capital Goods Index grew a marginal 1% to Rs.519.37 billion in Q4FY16 over Q4FY15. The operating profit margins (OPM) expanded 50 basis points (bps) to 13.2% from 12.7% over a year ago. Net profit rose by 29% to Rs.54.93 billion on higher other income and lower interest costs.
Standalone sales of BHEL declined 22% to Rs.100.0477 billion in Q4FY16 over Q4FY15. Hurt by lower sales, falling realization and change in mix of order executed in the quarter as well as provision for net dues from stalled projects, the OPM sharply contracted to 3.6% compared with 13.2% over a year ago. BHEL’s OPM is considered a proxy for industrial activity in the country. Its margins are sliding quarter after quarter. On lower sales and the OPM, OP was down 78% to Rs.3.6381 billion. After accounting for lower interest cost, depreciation, and lower taxation, net profit crashed 64% to Rs.3.4208 billion.
Consolidated sales of L&T were up by 18% to Rs.331.5704 billion, with the core infrastructure division registering a revenue growth of 19% to Rs.186.5488 billion. Higher sales together with 190-bp expansion in the OPM to 14.7% facilitated a 35% growth in OP to Rs.48.5917 billion. Hit by 25% fall in OI, higher interest and depreciation cost, and lower extraordinary income net profit could grow 19% to Rs.25.7817 billion over Q4FY15.
ABB India’s net profit spurted 31% largely due to the 10% growth in sales to Rs.20 billion as well as higher OI, lower interest and depreciation cost in the March 2016 quarter over a year ago.
Alstom T&D’s net profit slid 45% to Rs.298.7 million, hurt largely by the 29% dip in sales to Rs.9778.9 million, higher depreciation and higher taxation.
Private players continue to be cautious in the domestic market, reluctant to undertake fresh capex. Fresh order flow is expected largely from the central and state sectors in the medium term. Order finalization is expected to pick up in the current fiscal, being the terminal year of the 12th Five-Year Plan. Government agencies and government utilities will be aggressive in tendering and finalizing bids to meet their plan targets.
On the international front, lower crude oil prices have not yet dented the infrastructure investment by oil economies. But the industry players are expanding their market presence to include newer geographies.
Given the surplus capacity and aggressive competition for limited orders in the market, the medium term continues to be challenging. To boost the surreal scene in the industrial sector, the Union Cabinet approved the first-ever National Capital Goods Policy, with a clear objective of increasing production of capital goods to Rs.7500 billion in FY 2025 from Rs.2300 billion in FY 2015 and raising direct and indirect employment to 30 million from the current 8.4 million. The policy envisages increasing exports from the current 27% to 40% of production. It will increase the share of domestic production in India’s demand from 60% to 80%, thus, making India a net exporter of capital goods.
The auto ancillary industry reported strong numbers in Q4FY16. Revenues growth was reported in higher single digit and the net profit surged due to higher other income (OI), lower interest cost and steady depreciation charges. The margins witnessed 130basis-point (bps) improvement on lower raw material costs.
Aggregate sales of 76 major auto ancillary companies rose 8% to Rs.144.77 billion in Q4FY16. The operating profit margins (OPM) were up 130bps to 12.7%, leading to a 19% growth in operating profit (OP) to Rs.18.32 billion. OI increased 120% to Rs.2.49 billion. Interest cost fell 13% to Rs.1.74 billion and depreciation grew marginally to Rs.5.04 billion. Profit after tax (Pat) spurted 61% to Rs.10.74 billion for the auto ancillary industry.
Revenue of India’s largest auto ancillary Company Bosch reportedly grew 14% to Rs.27.14 billion and PAT rose 31% to Rs.3.76 billion in Q4FY16. The moderate rise in the margins, drop in depreciation charges and nil interest expense boosted the bottom line further. The OPM rose to 21.5% as against 19.6% a year ago due to decrease in raw material and other expenses leading to 25% increase in OP to Rs.5.8345 billion.
Consolidated PAT of India’s second largest auto ancillary player Motherson Sumi (MSSL), a subsidiary of the Japanese parent, was up 22% to Rs.4.137 billion. PAT jumped 18% at Rs.5.80 billion. Consolidated revenues grew 8% to Rs.102.35 billion. Domestic sales rose 14.5% and sales outside India rose 6.9%. The OPM increased 80 bps to 10.4% due to drop in raw material expenses, leading to a 17% rise in OP to Rs.10.64 billion. The 51% surge in depreciation charges truncated the bottomline growth.
Minda Industries, a mid-sized auto ancillary player making switches for two and three-wheelers, reported over two-fold rise in consolidated PAT at Rs.425.5 million in the quarter. Net sales rose 31% to Rs.7.1732 billion. Excellent performance at the operational level coupled with lower interest cost and some increase in extraordinary (EO) income were the main reasons for the spurt in profit. The OPM were up 450 bps to 11.4% due to dip in raw material expenses as a percentage of net sales, resulting in more than doubling OP (up 114%) to Rs.815.2 million.
Pat of Fiem Industries, a leading player in the automotive lighting industry, jumped 45% to Rs.194.5 million with a 24% rise in net sales to Rs.2.8886 billion. Higher interest, depreciation charges and higher employee costs partially offset the huge benefit from lower raw material costs. Thus, OP increased 31% to Rs.396.5 million.
The auto ancillary industry’s performance was muted in FY 2016, with motorcycle, tractor, light commercial vehicle and construction equipment segments remaining weak. While aftermarket revenues were relatively better, the industry growth moderated on weak exports and subdued domestic demand.
In line with the growth projections of original equipment manufacturers (OEMs), auto ancillaries incurred sizeable debt funded capital investments in FY 2011-13, straining their capital structure and coverage indicators. Given the demand slowdown and surplus capacities, the industry has been in a consolidation mode over the last two years. The industry-wide OPM are believed to have peaked in FY 2016 and expected to moderate going forward as benefits of declining commodity prices will be eventually passed on to automobile manufacturers.
The implementation of the Seventh Pay Commission in FY 2017 is expected to support urban and semi-urban segments such as passenger vehicles and scooters, whereas rural demand will be contingent on healthy monsoon.
Robust demand for passenger vehicles (PVs) in North America as well as Europe is likely to offset the expected decline in exports of medium and heavy commercial vehicles to those markets. Relatively better OEM and export demand expected in FY 2017 coupled with stable after-market consumption are likely to drive the overall auto component industry growth. The auto-component industry’s revenues are expected to increase 8.5-10% in FY 2017 as against 2.8% in FY2016, with some traction in the PV and motorcycle segments.
Over the medium to long term, expansion in the auto component industry will be higher than the underlying automotive industry growth, given the increasing localization by OEMs, higher component content per vehicle and rising exports from India.