Early Q3 earnings point to margin pressure, trend may continue in Q4

Early trends of third-quarter company results indicate that high input costs continue to be a bugbear. Profit margins moderated for yet another quarter even as earnings were mostly in line with street estimates.

Analysts said the continued rise in Covid-19 cases and the increase in crude oil prices mean margins would be under pressure in the current quarter as well.

Another worrying factor was demand, which didn’t get the boost expected from the festive season in a big way. Elevated inflation, delayed kharif (monsoon) crop harvesting due to unseasonal rains, and the dregs of the second wave of Covid infection cases seem to have weighed on demand during the third quarter (October-December).

A Moneycontrol analysis of 140 listed companies that have announced third-quarter earnings showed that their net profit grew by 5.65 percent from a year earlier compared with 3.26 percent growth in the September quarter. These companies reported profit growth of 28.03 percent in the corresponding quarter a year ago, according to ACE equity data.

Net sales growth was at a three-quarter low of 18.21 percent compared with 20.66 percent sequentially and 10.05 percent a year ago.

Catch the latest market updates here

The analysis excluded banks, financial services firms, oil & gas and insurance companies because they follow a separate revenue model.

Operating profit for these 140 companies rose 4.83 percent year-on-year, the slowest in seven quarters. In the corresponding quarter last year, operating profit had expanded 22.56 percent. The operating profit margin was 23.64 percent in the third quarter, the slowest since Q4 of FY19.

“In the initial trend, the IT pack certainly deserves mention as mostly showing growth in sales and profitability trend with encouraging guidance,” said Ajit Mishra, VP – research at Religare Broking. “On the other hand, consumption-driven names have been impacted as the base normalises. Moreover, high input cost has further impacted their profitability. We’re hopeful that the upcoming results, especially from the banking pack, would be encouraging on the back of further easing in asset quality concerns.”

The rural economy is moderating and a reversal of this is possible only through government support, Hindustan Unilever said on its earnings call on January 20. The company said raw material costs will firm up further in the March quarter. The country’s largest FMCG company reported a 16.8 percent on-year rise in 3Q net profit to Rs 2,243 crore.

Also read: HUL Results | Should you buy, sell or hold the stock after Q3 figures?

Crude oil prices fell on January 21, after rising to a seven-year high earlier this week.

Bajaj Auto, a manufacturer of motorcycles and three-wheelers, said earlier that there was demand pressure on motorcycle sales in January. The company reported a 10 percent decline in volumes year-on-year despite the festive season, which suggests there wasn’t much pent-up demand.

All eyes now are on the Union Budget, scheduled on February 1, with investors hoping the government will announce fiscal measures to boost consumption and investment.

(Chiranjivi Chakraborty contributed to this story)