If one has followed the gyrations of the equity markets in FY22, there is a lot of hope riding on the fourth quarter earnings of Indian companies even as inflation, a war, and the unfriendly central banks have dented sentiment.
As the quarterly results begin rolling out next week onwards, companies may deliver on the hope but with enough pockets of trouble.
Analysts at Kotak Institutional Equities expect the aggregate net profit of the companies belonging to the BSE-30 Index to expand by 26 percent year-on-year for Q4FY22. Nifty 50 companies may report a net profit growth of 27 percent.
This would mean that earnings per share of the BSE-30 companies would improve to Rs 2,680 for FY23 and further to Rs 3,000 for FY24. This robust growth would be led by banks, oil and gas companies, utilities, metals and mining, and consumer durables.
Financial companies such as banks are expected to report robust balance sheet growth after a weak streak in the past few quarters. Early releases by some lenders have confirmed this trend. Further, the pick-up in economic activity would lead to reduction in stressed assets which would further boost profitability.
Banks could end up with loan growth of 9 percent in FY22 which can rise to 11-12% in FY23. “Q4FY22 performance for NBFCs/HFCs is likely to see further business traction and asset quality improvement,” wrote analysts at ICICI Securities Ltd in a note.
The surge in global prices of oil and other key commodities such as steel will add shine to companies that supply these. For instance, upstream oil and gas companies would gain from higher realisations while downstream companies would get a boost from higher refining margins. Steelmakers would also benefit from higher realisations although soft domestic demand could check operating performance somewhat.
This is where the good part ends in the earnings show for the fourth quarter. The differentiating factor in earnings would be inflation and its impact on the operating profitability of companies. While oil, gas and other utilities may gain from inflation, a host of consumer focused sectors may put up a weak show.
Analysts believe that consumer focused companies such as automobiles, cement, and fast moving consumer goods (FMCG) may either see profits shrink or stay stable for the March quarter. Input cost inflation is expected to bite into margins in a big way and a still modest consumption demand would continue to be a drag as well.
“Gross margins are likely to remain under pressure, with significant improvement likely only beyond 1HFY23,” noted analysts at Motilal Oswal Financial Services Ltd. They add that some companies have been forced to pass on higher costs to consumers through price hikes which may have an impact on revenue growth.
Perhaps the biggest brunt of inflation and the supply disruption would be borne by automobile companies. Kotak analysts expect automakers to report 18 percent decline in EBITDA (earnings before interest, tax, depreciation and amortisation) for the March quarter as chip shortages impact production, input cost inflation bites margins and demand continues to be soft. To be sure, commercial vehicles may show a recovery, a silver lining for auto companies.
Among services, information technology companies are expected to report strong earnings although margin pressure would be visible. Traction in contract renewals, the sustained pivot of industries towards tech and a weak rupee would aid IT companies in reporting a decent operating profit. That said, inflation, geopolitical factors and the surge in wage costs may bite tech firms’ margins.
“Further, revenue is expected to be strong for IT companies on the back of a steady demand however employee cost and attrition will be key monitorable,” said Ajit Mishra, vice president - research at Religare Broking.
It is clear that sectors at the receiving end of inflation may drag down the overall profit and revenue growth of listed companies. Kotak expects that excluding banks and oil, gas and consumable fuels, the net income growth of companies under their coverage to show a modest 9 percent growth.
Besides inflation, the lingering dregs of the Omicron variant of covid-19 during the fourth quarter has kept up pressure on revenues of companies, especially those with a consumer focus.
Investors would now focus on the management commentary to assess the outlook for FY23 which so far portends to have elevated inflation and tighter capital markets.
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!
