Q2 results review: How corporate India fared in the second quarter of FY22

The second-quarter results season has reached its fag end now with all the mainstream companies having declared their results. Most of the companies benefitted from the removal of COVID-related restrictions, increased vaccination, opening up of economy, increased production activity and pent-up demand in many sectors.

Though commodities and oil and gas were the outperformers, the performance of other sectors was also in line with the market expectations. Experts expect the uptrend in earnings to continue in the remaining half of the year too.

The overall demand gained momentum, but the rise in raw material prices, crude and other input costs resulted in shrinkage of operating margins of sectors like Specialty Chemicals, Autos, Cement, and Consumer Staples.

“The quarter brought to the fore two important trends: an improving demand environment post the opening up of the economy and the impact of rising input costs on operating margins,” said the brokerage firm, Motilal Oswal.

Management commentaries also indicated an upbeat overall demand scenario. However, they expect strain on operating margins to continue, given the inflationary input price environment.

The number story

“We saw aggregate EBITDA margins dip by 80 bps QoQ for Nifty. On a sequential basis, PAT margin expanded for Nifty/Midcap by 210/340 bps while on YoY basis, it expanded for Nifty/Midcap by 160/230,” said Phillip Capital.

“Despite cost pressures across sectors, earnings beat was significant within the NSE200 universe (86 beats vs 48 misses),” said ICICI Securities. This was attributed to better-than-expected demand in terms of topline growth and signs of pricing power across sectors such as cement, steel, paints, building material, FMCG and auto, which is expected to continue into Q3FY22.

Revenue growth for non-financial companies in the NSE200 universe improved at 32 percent driven by cyclicals (metals, oil and gas, discretionary consumption, logistics, paints, chemicals, etc).

Higher commodity prices impacted the margins across industries while higher wages impacted the margins of the IT sector because of which the overall EBITDA growth was lower at 27 percent. PAT growth, however, was strong at 51 percent (42 percent including financials).

Phillip Capital highlights that the Revenue, EBITDA and PAT were seen higher on an average for 43 percent of the companies in Nifty50 and Midcap100. While earnings miss was seen on an average for 34 percent of the companies.

Motilal Oswal puts the Nifty sales/EBITDA growth in-line at 31 percent/21 percent YoY (v/s est. 25 percent/20 percent YoY), while PBT/PAT growth came in at 40 percent/36 percent YoY (est. 31 percent/25 percent). “Among the Nifty constituents, 48 percent beat our PAT estimates, while 28 percent missed expectations. Excluding metals and O&G, Nifty profits posted 13 percent YoY growth which was in-line with our estimates,” added the brokerage.

Sectoral performance

Technology: This sector continued to witness robust revenue growth in this quarter as well as it has been witnessing for the past 4 quarter. Most of the top-tier companies reported better-than-expected overall numbers.

O&G: Higher crude and gas prices as well as strong marketing margins of the oil marketing companies helped this segment post robust performance in the quarter.

BFSI: The majority of companies/banks in this sector witnessed strong growth across retail, MSME and business loans segment. Most of the banks were able to improve their asset quality and collection efficiency. NBFC companies also saw similar trends in this quarter.

Consumer: The increase in discretionary consumption during this quarter was overshadowed by higher raw material prices which impacted the gross margins of the companies in this sector. However, 11 of the top 18 companies managed to post double-digit growth in revenues.

Cement: The cement sector in the quarter was plagued by high energy and freight costs which, coupled with muted demand due to back-ended monsoon, severely impacted all the companies.

Auto: The sector was severely impacted by the worldwide semiconductor shortage which impacted production. Higher commodity (metal) prices jacked up the production costs and not all of it could be passed on to the customers which resulted in margin contraction.

What lies ahead

Going forward, market movements are likely to be determined more by global developments like spurt in inflation and a sooner-than-expected hike in interest rates by the central banks.

“There are some concerns on the macro front like the high debt-to-GDP ratio that’s now at 90 percent, crude spikes that can be another headwind, and inflation that will rise in the coming months putting pressure on the RBI to depart from the accommodative monetary stance,” said VK Vijayakumar, the Chief Investment Strategist at Geojit Financial Services.

The current scenario of inflationary environment is a result of faster-than-expected demand recovery, supply constraints and signs of pricing power for manufacturers.

As per the brokerage, ICICI Securities, “the above environment is not negative for equities as it will attract private sector investments as realizations improve”. Bond yields are reflecting the transient nature of inflation with US and India bond yields relatively stable at 1.6 percent and 6.3 percent, respectively, it added.

The fiscal consolidation, low current account deficit and ample foreign exchange reserves are clear positives. Also, demand pull will improve capacity utilisation as supply bottlenecks reduce leading to operating leverage which will benefit the industry.