Consumer Durables, Engineering and Capital Goods, Fast Moving Consumer Goods and Metals and Mining sector companies have announced the results for the quarter ended June 2017. The trend appears to be concerning for most of the metal and mining companies with regards to rise in overall costs and decline in profitability but revenue growth and demand remains robust. Consumer Durables and FMCG companies are expected to show gradual recovery in volume growth as the implementation of GST smoothens out over a period of time. Engineering and Capital Goods companies have shown healthy growth in order book due to inflow of orders from the Government spending on infrastructure. The healthy order book has not yet transformed into rise in revenues and profitability for these companies.
The results and sector specific financial performance is discussed below:-
Most of the Consumer Durables Companies have reported healthy rise in revenues for the first quarter of the FY 2017-18. The net profit has actually declined for companies like Havells India, Bajaj Electricals and IFB Industries on a year on year basis due to the rise in costs of raw materials, finance costs, employee benefit expenses and promotional and advertising expenses which the companies were not able to pass on to the customers. The margins came under further pressure as a result which were already down due to the demonetization effect. Whirlpool India reported strong growth in revenues but profitability improved at a relatively much lower rate.
For Havells India uncertainty, lack of clarity and a general regulatory fear about GST implementation led to significant decline in primary off-take by channel partners. The secondary sales were above usual level in June, leading to substantial inventory de-stocking at primary level. The de-stocking process commencing in late May gained notable momentum by end of June. The impact was across product categories barring cables and wires. Margins were impacted due to disproportionate decline in high margin non-cables business. The deceleration in sales growth resulted in adverse operating leverage reflecting in lower profitability.
Havells India Ltd stock has risen 45% year to date and trades at rich valuation on the hope that recovery would gather pace in the second half of FY 2017-18.
The Union Budget announced tax cuts for the Rs.2.5 lakh to 5 lakh slab which would increase the disposable income in the hands of the middle-class people. The implementation of the 7th Pay Commission and decent monsoon in the year should give a boost to consumer durables demand in the near future and help for the lost ground due to demonetization.
The P/E ratio continues to be on the higher side for Havells India (64) and Whirlpool India (53) due to the expected growth in their respective business segments. IFB Industries and Bajaj Electricals continue to witness relatively lower valuations due to relatively lower overall growth with a P/E of 31 and 36 respectively.
Majority of the FMCG companies have reported tepid growth in revenues and net profit for the first quarter of FY 2017-18. The volume growth had already been low or negative as demonetization affected sales of most of the companies in the fourth quarter of FY 2016-17. Volume growth, even though expected to recover in the coming quarters has in fact declined in the last quarter.
Hindustan Unilever reported a flat volume growth during the first quarter ended June 2017. The company indicated that the sentiment during the quarter was cautious in the run up to GST rollout. It noted that despite high promotional intensity, stock pipelines remained low and varied across categories, channels and geographies.
Dabur reported a 4.4% decline in the volumes on a year on year basis. Sales plunged in June across all consumer categories in view of the massive de-stocking by trade channels just ahead of the implementation of the Goods & Services Tax. The overseas markets also continued to face severe headwinds with currency devaluations and economic turmoil in key geographies for the company.
Colgate-Palmolive (India) reported a decrease of 3% over Q1 of the previous year in revenue, largely due to destocking in the trade channel ahead of the implementation of GST. Volume declined 5% during the quarter. The Company continues to maintain its leadership position in both the Toothpaste and Toothbrush categories, with volume market shares at 54.3% and 45.0% respectively in Q1 2017-18.
Better than expected monsoon will be able to fuel rural demand, boost demand & consumption, bring down inflation and will help earnings growth of FMCG companies.
The valuations continue to be expensive for FMCG companies with the P/E being in the range of 43 to 73 for companies mentioned in the table. Implementation of GST along with an expected normal monsoon is keeping these stocks on the boil.
Engineering and Capital Goods
The revenue growth was healthy for Larsen and Toubro and ABB India but it was poor for companies such as Bharat Heavy Electricals and Siemens. The order book for companies such as Larsen and Toubro and Siemens remain robust. The net profit growth was stellar for Larsen and Toubro and Siemens.
The positive highlight of results was strong pick-up in domestic infrastructure execution and infrastructure ordering for L&T. The Company has given a growth guidance of 12-14 per cent for order inflows and 12 per cent for revenue growth for 2017-18, which hinges primarily on government spending. The value of the order book of the company stood at Rs.2.629 trillion at the end of June 2017 (up 2% y-o-y). During the first quarter of 2017-18, the order intake degrew 11% (q-o-q). Order inflow reflects muted capex environment with the trend of higher public sector outlay vis-a-vis reduced capex of private sector.
Siemens Ltd, referred to as the trains-to-turbines company, reported tepid growth in order inflows in the first quarter of FY 2017-18. Siemens said its business focused on government spending is doing well.
For most of the Engineering projects in the country related to infrastructure Government spending was responsible for the inflow orders in the recent quarters. Private spending and investment related to infrastructure has not shown any recovery in the first quarter of FY 2017-18 and is not expected to pick up anytime soon. Firms with exposure to government investments in power transmission, railways and infrastructure sectors are seeing increased order inflows.
The valuations seem overtly expensive for companies such as ABB India (P/E – 78) and BHEL (P/E – 67) while those for L&T (26) and Siemens (15) look relatively reasonable if we compare the overall business outlook for the FY 2017-18. Looks like expectations from ABB India are high as the order inflow has been robust since the year 2016 onwards.
Metals and Mining
Barring Coal India all the metal and mining companies in the table below have reported stellar rise in revenues in the first quarter of the FY 2017-18. The net profit for most of the companies except NMDC as given in the results table has declined on a year on year basis due to rise in overall costs.
Iron ore prices, which impacted NMDC’s performance last quarter, are finally heading north as Chinese steel mills look to boost steel output as steel rebar prices continue to track higher. Rising consumption from China’s property, infrastructure and manufacturing sectors has been a major influence on China’s stronger steel prices this year. China’s government plans to reduce overcapacity and reduce pollution has also helped steel prices to rise.
For NALCO production of bauxite, used to produce alumina, grew 10.4% over 17.04 lakh tonnes over Q1 of FY 2018. Alumina hydrate production was 0.4% higher to 5.26 lakh tonnes compared with 5.24 lakh tonnes. Nearly one lakh tonne of aluminum was produced, 6.6% higher. The total alumina sales were 2.59 lakh tonnes and aluminum sales were 88.752 lakh tonnes. Total calcined alumina production in India was about 61 lakh tonnes in FY 2017 where Nalco’s share was about 35% at 20.32 lakh tonnes.
The valuations seem reasonable for most of the metal and mining companies (P/E in the range of 15 to 27) as a year on year rise in revenues got factored in the stock prices. The uptrend in commodity prices indicates declining profitability but rise in revenues reflect valuations rising to higher levels for most of the metal stocks.