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Q3 earnings: Profits shrink as high costs nullify sales growth.


Date: 21-01-2019
Subject: Q3 earnings: Profits shrink as high costs nullify sales growth
The December quarter earnings season wasn’t expected to be an exciting one and while these are early days, the results so far have been ordinary. As anticipated, revenues have risen sharply but so have costs and competition; consequently, margins are under pressure. Hindustan Unilever (HUL) reported strong volumes, up 10% y-o-y, and net operating revenues, which rose 11% y-o-y. However, the domestic business grew at a somewhat subdued 13% y-o-y, possibly due to the less-than- expected pricing power.

If HUL managed to post good Ebitda margins despite keen competition, it was by by reining in costs — employee costs declined 5% y-o-y while ad spends were down 50 bps as a share of revenues.

At TCS, revenues were strong but margins were weak, contracting 90 basis points quarter-on-quarter.

Analysts believe growth at India’s biggest software service player will slow down in 2019-20, given the signs of a macro-slowdown in the US. Infosys, too, reported a very smart topline growth; revenues in constant currency rose10.1% y-o-y.

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However, the IT major’s Ebit margins fell 110 bps q-o-q due to a higher on-site mix and a lower utilisation rate. Costs and competition hit Avenue Supermarkets’ where Ebitda margins slipped 200 basis points y-o-y, even though revenues were up 33% y-o-y. The retailer reported net profits that missed analysts’ estimates.

For a sample of 67 companies (including banks and financials), operating profit margins contracted 300 basis points year-on-year. Revenue for IT companies were boosted by a weak rupee and as such total revenues jumped 39% y-o-y. However, excluding Reliance Industries (RIL) which accounts for close to 60% of the aggregate, they were up just 20.85%. The net profit for the sample grew just 7.84% y-o-y. RIL’s bottom line was boosted by strong refining margins and higher other income.The December quarter was, in fact, tipped to be the weakest so far in 2018-19 thanks to the shortage of liquidity and the slight slowdown in spends by the government and the unfavourable base. But the very dull festive season was a clear evidence that demand is muted. That’s despite the gains that exporters will reap from the rupee depreciation. While revenues would grow smartly given commodity prices remain elevated — and these would be helped by the weaker currency — the high raw material costs would also hurt users, crimping margins.

Source: financialexpress.com

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