Indian companies reported a pickup in net sales in the September quarter from a year ago on the back of price increases. However, volume growth remained under pressure on higher inflation and slowing rural demand, analysts said.
A timeline for a significant recovery is difficult to predict because of interest rate hike fears amid higher inflation, geopolitical tensions, and an energy crisis in Europe that’s likely to disrupt growth in the near term, analysts said.
A Moneycontrol analysis of the earnings of 115 companies for which comparable data is available for 12 quarters showed that aggregate net sales increased 19.7 percent year on year and only 3 percent quarter on quarter.
Earnings adjusted for extraordinary items, however, dipped 0.33 percent from a year ago, the worst performance in four quarters. Net profit climbed 5.2 percent QoQ.
Operating profit rose 3.3 percent YoY, the slowest in nine quarters. The operating profit margin (OPM) was at 20.78 percent in the quarter. Net profit margin (NPM) was at 12.41 percent, little changed from a quarter ago. Total costs rose 24 percent from last year, in double digits for the seventh straight quarter.
“Net sales have risen due to inflation. The net profit margin and profit are curtailed due to higher total costs,” said Deven Choksey, managing director of KRChoksey Investment Managers. “We expect inflation to remain high for the next quarter and it will likely come down from the first quarter of the next fiscal year. Till then, firms may take further margin hits.”
Commodity costs
The analysis excluded extraordinary profit and loss items. Financial and energy companies were not included because they follow a different earnings model.
Margins contracted as total costs shot up in line with a surge in commodity prices. The Bloomberg Commodity index of 22 raw materials, from oil to metals, gained 12 percent so far in 2022 and Brent crude oil jumped 20 percent.
Although the indicators declined 5 percent and 18 percent, respectively, in the September quarter, commodity costs for companies will remain high due to a lag effect.
“OPM and NPM have come in at multi-year lows, suggesting pressure due to raw material and fuel/power inflation and interest costs, which have not been passed on fully,” said Deepak Jasani, head of retail research at HDFC Securities. “Also, the inflated sales number (with lower volume growth) seems to have played a part in depressing the OPM/NPM number. A better number to track could be the absolute margin per volume factor.”
Interest costs rose 12 percent YoY and 7.3 percent QoQ, both at multi-year highs. Analysts said interest costs have risen partly due to higher borrowing (for working capital mainly) and higher interest rates.
India’s Consumer Price Index (CPI) inflation accelerated to 7.41 percent in September. CPI inflation averaged 6.3 percent in January-March, 7.3 percent in April-June, and 7 percent in July-September.
Most IT companies continued to report strong earnings amid macro challenges. They reported higher deal wins, strong margins and steady top line growth. HCL Technologies and Infosys increased their revenue guidance for FY23. However, analysts were concerned due to slowing hiring, softening demand and currency headwinds.
The cement sector was a laggard as power and pet coke costs dented margins and profitability, analysts said. Ultratech Cement reported a 15.6 percent YoY growth in net sales, although revenue fell 8.4 percent QoQ. EBITDA declined 31.2 percent after increases in the cost of power and fuel, raw material, and freight and forwarding. Shree Cement reported weak earnings due to lower volumes and realisation and higher raw material costs on account of a rise in inventory levels, analysts said.
Asian Paints reported lower-than-expected earnings. Revenue increased 19 percent while volume growth stood at 10 percent against the 12 percent expected by analysts. The gross margin contracted 200 basis points QoQ. EBITDA was at 14.5 percent against an estimated 19.5 percent.
“Results were well below estimates as realisations and gross margins were severely impacted, primarily led by product-mix deterioration caused by (a) slower growth in high-margin urban sales, unlike a preceding couple of quarters, and (b) the adverse impact of downtrading,” Motilal Oswal Research said in a note to investors.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
