After a stunning return to the first wave of the pandemic, India Company continues to build on the recovery. The early results aren’t amazing, because margin pressures are apparent, but there is sales momentum. Part of this comes from better volumes, but surprisingly, also from higher prices. Not only are commodity producers enjoying an upward race with a strong perception, manufacturers of other products have also been able to take price increases to pass on increased input costs.
Total sales of a sample of 202 companies (excluding banks and financial firms) increased 35% year-over-year in the three months to September. Excluding Reliance Industries (RIL), the increase is more realistic, at just 27% year over year. The bottom line also loses some of its luster if the RIL is left out; The increase was only 22.5% year over year, which is down from 26.5% year over year for the sample. Once again, IT players dominate the sample with their good performance. Every software service company performed well, and their only concern was high levels of attrition.
It has been much more difficult for retailers and FMCG retailers. As demand returns across markets – urban and rural, and Tier 1 and Tier 2 cities – it is taking its time. On the weak base of Q2FY21, sales growth was reasonably good. At the Avenue Supermart retailer, independent revenue was up nearly 50% year over year, driven by better footfall after the second wave. Standalone revenue at Shoppers Stop more than doubled year-over-year, helping the retailer report positive swap benefits and narrow the net loss.
Domestic two-wheeler sales continued to be somewhat lackluster but strong exports boosted revenue. For example, TVS Motor reported a smart increase of 22% year-over-year; Export volumes jumped 46% year-on-year while domestic volumes fell 8% year-on-year. While the demand for motorcycles was low, the production of premium motorcycles was affected by the lack of chips.
Not all companies were able to afford price increases to protect margins; In fact, some, such as Asian Paints, have preferred to increase volumes and hold market share at the expense of margins. Asian Peanuts’ consolidated gross margins contracted 965 basis points year-over-year. At Hindustan Unilever, gross margins contracted 140 basis points year-over-year, while EBITDA margins decreased by 45 basis points year-over-year. Once again, higher prices for edible oils and packaging materials reduced Nestlé’s gross margins by 240 basis points year-over-year.
If input inflation continues, even commodity producers may be hurt; Analysts point out that rising raw material costs – for items like coal – are already offsetting gains from better achievements for some steelmakers. The sample raw materials-to-sales ratio increased 355 basis points, resulting in an operating profit margin (opm) shrinking by about 45 basis points annually.
However, the recovery was fairly extensive. At Indian Hotels, for example, domestic business has recovered to 86% of pre-Covid revenue while the international portfolio has returned to 62% of pre-pandemic levels. Management’s comments were somewhat reassuring and companies are confident that business will rebound as the economy opens up and movement increases.
In fact, some players continue to carve out a share of the smaller and disorganized players. While higher input costs could dampen profit margins, better revenue momentum in the coming quarters could cushion the blow.