It's going to be a mixed bag of first-quarter earnings for investors

Results for 25 May: BPCL, Coal India, Deepak Fertilizer, Apollo Hospitals Enterprises, HEG, NHPC, Easy MyTrip, Fortis Healthcare, GMM Pfaudler, InterGlobe Aviation, JaiCorp, Kolte Patil, Bata India, Nalco, PFC, Torrent Pharma, Whirlpool, MSTC.

The first-quarter earnings of companies is expected to be a glass that is half full but also half empty. A low base will lift net profit, but higher input costs could mean margins will be under severe pressure.

April-June will be the first normalised quarter after the pandemic with no major disruptions due to Covid-19. However, the fallout of the Russian-Ukraine war on commodity prices will be reflected in the balance sheets of Indian companies.

There’s been more volatility in the global markets in the first quarter of FY23 than in any previous period as commodity prices swung wildly, making it hard for investors to assess the impact on balance sheets here.

The net profit of BSE-30 index companies will grow 23 percent year-on-year but decline 10 percent sequentially, according to Kotak Institutional Equities. Nifty companies may post a 27 percent year-on-year growth and a sequential 11 percent drop in net profit.

Sectors that will drive profitability will be financial, retail, consumer durables, multiplexes and chemicals, while commodity-linked firms will have a more mixed picture.

Leaders forge ahead

Currently, the banking sector is among the most favoured in the market with good reason. Analysts say both banks and non-bank finance companies may continue to show robust profitability metrics. A smart bounce-back in loan disbursals and a decline in delinquencies is expected to beef up net profit of lenders.

However, a key headwind is expected from treasury losses due to the spike in bond yields. Banks could report large treasury losses, which could drag non-interest income and operating profit.

“We expect our banking coverage universe to deliver 26 percent YoY growth in profit after tax in 1QFY23, while pre-provisioning operating profit will undergo a marginal YoY decline, largely due to higher mark-to-market losses,” analysts at Motilal Oswal Financial Services wrote in a note.

Bond yields have surged across tenures during the quarter, resulting in prices falling. Banks are mandated to mark bonds in their trading book to current market prices and offset such losses against their income.

Beyond financials, retail and services could show robust profitability. Retail sector firms may report better earnings on the back of a low base, removal of restrictions on store operations and business returning to normalcy with the rising ‘return to office’ trend. The increase in social gatherings, festivals, weddings and opening up of schools and colleges also benefited the sector.

“Recovery in retail footprint should help QSR  (quick service restaurants), especially Devyani’s KFC, which has higher dine-in share. Cricket-IPL should support delivery sales for QSR and food tech (Zomato). Store additions continue to support revenue growth, but aggressive network expansion and store splitting in case of Jubilant would likely weigh on SSG (same-store sales growth),” analysts at Jefferies India wrote in a note.

Another sector that could lift profitability is automobiles, given that supply chain issues seemed less disruptive.

“We noted the supply chain situation remained broadly intact (slightly better visibility related to chip issue) while we don’t foresee any incremental impact of geopolitical tensions and China lockdown in 1QFY23,” analysts at Yes Securities said in a report.

However, much of the robustness in metrics would be cosmetic as they would come off a low base. While vehicle manufacturers’ operating performance may improve, their margins are likely to be impacted by high input costs.

“1QFY23 will see increase in commodity cost on account of steel prices (negotiations are ongoing) and crude derivatives, diluted by some softening in other commodities as well price hikes taken by the OEMs (original equipment manufacturers),” Motilal Oswal said in a report.

The empty glass

The sharp swings in commodity prices during the quarter are expected to hurt metals, cement and oil marketing companies. The Bloomberg Commodity index increased 26 percent in the March quarter and fell 7 percent in the June quarter, a reflection of the volatility in their prices.

Among oil & gas firms, upstream companies may report a surge in earnings due to elevated crude and domestic gas prices while oil marketing companies may report massive losses due to large negative marketing margins, forex losses and LPG under-recoveries.

Information technology companies could report pressure on margins, while worries over a recession in the US could weigh on the outlook for the sector. Indeed, analysts expect management commentary to be more sobering this time.

Input cost blows could be seen in FMCG companies as well, with their volumes dented after they hiked prices in response. Recently, Marico reported that its volumes “declined in mid-single digits” in the June quarter.

Godrej Consumer pointed out short-term challenges like continuing global commodity inflation that have impacted consumption and margins. Godrej also expects to report mid-single digit drop in quarterly volumes in India.

Dabur India said input cost pressure combined with portfolio mix changes led to a 200 basis points year-on-year fall in operating margins during the quarter.

Cement makers’ earnings may be muted as margin pressures continue in the near term due to higher energy costs (coal and petcoke) and weak realisations.

Given the mixed performance expected by companies for Q1FY23, analysts have slashed earnings per share estimates. Those at HDFC Securities said EPS estimates could see the knife further in FY23.