The third quarter of the FY 2016-17 witnessed a demand shock for most of the industries such as Automobiles, Fast Moving Consumer Goods and Cement while the Information Technology industry had its own reasons to worry about. Even though there is a recovery expected in the last quarter of the FY 2016-17, for industries such as FMCG and some segments of the Automobile sector, most of the companies have indicated uncertainty about the pattern of its recovery.
The impact of demonetization is evident in the financial performance across sectors that ride on the consumption theme but there are some companies within the industry that have weathered it perfectly.
Sector and company wise third quarter FY 17 performance are as below.
The Automobile industry was expected to witness drastic reduction in demand for vehicles after the demonetization of the higher denomination notes in the month of November 2016. Sales of Passenger vehicles, commercial vehicles, two wheelers and three wheelers suffered a setback in the month of November and December after it showed a year on year decline. The month of January 2017 has shown sharp recovery in demand for most of the segments of the Automobile industry.
The Sales of Passenger Vehicles, Two-Wheelers and Commercial Vehicles grew by 9.17 %, 8.29% and 3.03% respectively in April-January 2017 over the same period last year. Three-Wheeler sales declined 1% in April-January 2017 over the same period last year. In April-January 2017, overall automobile exports declined by 7.39 %. While Passenger Vehicles and Commercial Vehicles exports registered a growth of 17.24 % and 8.20 % respectively, exports of Three Wheelers and Two Wheelers declined by 34.02 % and 9.73 % respectively in April-January 2017 over April-January 2016.
The demonetization of the old Rs.1000 and Rs.500 notes has impacted the quarterly financial results of the Commercial Vehicles, Two Wheelers and Passenger Vehicle manufacturers. Bajaj Auto and Hero MotoCorp have shown decline in sales and net profit in the Two Wheeler segment while Tata Motors has shown drastic reduction in net profit in the Commercial Vehicle segment. During the quarter, commercial vehicle segments of Tata Motors witnessed demand shrinkage due to demonetization with M&HCV segment reporting a fall of 9.0% in volumes on a year on year basis while LCV segment witnessed flat growth.
Maruti Suzuki and Eicher Motors have weathered the demonetization storm with robust growth in sales and net profit. Large order book for new models coupled with financing for 80% to 90% of the sales has helped Maruti Suzuki in posting surge in sales and profitability.
Valuations continue to remain expensive for Maruti Suzuki and Eicher Motors due to higher than industry growth while that for Tata Motors shows no respite as it remains uncertain whether growth would pick up in the last quarter of FY 2016-17. The interesting point to be noted is that stocks such as Maruti Suzuki has become more expensive as compared to the second quarter of FY 2016-17 while others have seen erosion in market capitalization.
The implementation of the 7th Pay Commission and the GST, healthy monsoons in the year 2016 and reduction in the rate of taxation for middle class is expected to revive demand for automobiles in the near term, albeit not immediately but with a lag effect.
The revenue growth continues to weaken for most of the Information Technology companies with the traditional model not delivering on the growth. The lower spending by the companies in the developed markets of the US and Europe continues to take a toll on the revenue addition for IT companies in India.
Infosys has tweaked its full-year FY 2016-17 revenue guidance in constant currency terms to 8.4%-8.8% on a year-on-year basis, compared with 8%-9% earlier. This translates into dollar revenue growth of 7.2%-7.6% on a YoY basis based on December 31 exchange rates. The lower guidance takes into account slowing momentum in the global banking financial services and insurance (BFSI) sector.
In terms of dollar denominated revenue and profit growth on a sequential quarter on quarter basis all the companies have shown dismal performance. The IT industry may continue to grow but the overall growth rate continues to slow quarter after quarter.
TCS has announced a buyback of shares as per the latest announcements to address shareholder concerns. The TCS board has cleared the proposal to buyback its shares worth Rs.160 billion. The company said it will buyback up to 56.1 million shares, or 2.85 percent of its share capital, at Rs.2,850 per share. Infosys plans to spend USD 2.5 billion or Rs.167 billion on its buyback plans beginning April 2017. The company’s board would seek shareholders approval through postal ballot with regard to adoption of new Articles of Association instead of the current one. The proposal being mooted will allow the new Articles of Association to include provision for a buyback written into it.
The valuations for these companies continue to be in the range of 13 to 19 in the current scenario, which were in the range of 14 to 21 after results were declared for Q1FY17.
Impact of demonetisation was more in the North and Central regions while the Southern region was the least impacted because of fewer cash transactions.
Ultratech Cement and Shree Cement in the North and Central region have delivered dismal performance in Q3FY17 while companies in the Eastern and Southern region – Dalmia Bharat and The Ramco Cements have delivered robust performance in comparison.
The Indian cement industry is estimated to have a capacity of about 420 million tons with ACC, Ambuja Cement, UltraTech Cement and Dalmia Cement cornering about 40% of the market share. Last year, cement manufacturers benefitted from low fuel and commodity costs. However, prices of coal and petcoke have risen sharply in the past six months, leading to higher fuel costs. In this context, lack of pricing power with the companies could hurt performance going forward.
Increased government allocation in Union Budget for infrastructure development, housing, roads, and railways is expected to boost demand for cement and concrete industry in the year 2017.
The valuations continue to be on the expensive side for most of the Cement companies because of the expectation of strong growth in the year ahead due to higher allocation for infrastructure and affordable housing by the Government in the Union Budget 2017-18.
Most of the Fast-Moving Consumer Goods (FMCG) companies have reported decline in sales and net profit on a year on year basis due to a decline in demand for their products due to the demonetization effect.
The larger companies have reported greater fall in sales and profitability on a year on year basis. While all consumer companies extended credit to their distributors and channel partners it remained a challenge to get goods moving immediately after the November 8 demonetisation exercise. Sales in smaller towns and villages froze for about a week and then recovered slowly. However, all companies reported that the month of December was better than November and sales in January have been better than in December.
Godrej Consumer Products, which derives 48% of sales from the overseas market reported relatively robust growth in sales but profitability came under pressure.