OMCs pull down India Inc sequential profits in Q1FY23

  • India Infoline News Service
  • 17 Aug , 2022
  • 9:53 AM
Out of 4,300 stocks listed on the BSE, over 3,600 companies have announced results. The companies included in the NSE-500 have already declared their results by the second week of August. Here is a macro look at how Q1FY23 panned out.

Macro picture encouraging on top line growth

If you consider the aggregate of over 3,600 companies that have announced their results for Q1FY23, revenues have stayed robust on a yoy basis. Sales Revenues were up 41% yoy for Q1FY23. However, the growth has not been driven by volume as much as by price hikes. As demand in most sectors has remained robust, higher cost of inputs have been easily passed on through price hikes. Some of the major sectors which evinced pricing power include automobiles, chemicals, paints and FMCG products.

Sales on a yoy basis can be misleading due to the base effect. In a dynamic business environment, comparing 4 quarters apart may not capture momentum. That is why we also look at sequential growth or the QOQ growth in sales; over the March 2022 quarter. On a QOQ basis, sales were up just about 4.2%, or you can almost call it marginal. Like in the previous quarter, the other income saw a sharp fall of -27.2% in Q1FY23. This can be attributed to rising yields, due bond prices being marked down.

Cost controls help profit growth to hold in Q1FY23

We look at gross profits and also net profits. Gross profit captures the contribution of the core products manufactured by the company. On the other hand, the net profits are the bottom line. Here is how they panned out during the quarter and it must be said that the pressure of rising input costs is still visible across most manufacturing sectors.

Gross profits were up 14.1% yoy, which is at par with the previous quarter. However, if you look at gross profits on a QOQ basis, it is down by -7.6%. In most cases, the ability of companies to pass on cost hikes to customers was constrained by recession fears. The pressure was evident in margins. Gross profit margins tapered from 12.2% to 9.9% yoy, while on a QOQ basis, gross margins tapered from 11.2% to 9.9%. The global spike in commodity prices resulted in input cost pressures, which could not be fully passed on.

For Q1FY23, the net profits for India Inc were up 22% on a yoy basis, which is impressive. However, on a QOQ basis, the net profits were sharply down by -20.3%. If you look at net margins for Q1FY23, it is down from 8.9% to 7.7% yoy. However, on QOQ basis, net margins dipped sharply from 10% to 7.7%. Compared to the March 2022 quarter, the pressure on gross profits and on net profits is much higher in the June 2022 quarter. That is because the input cost spikes could not be offset by price hikes amidst recession fears.

Before going to a sectoral analysis, here is a quick caveat. The downstream oil companies (IOC, BPCL and HPCL) reported a combined net loss of over Rs-19,000 crore. That was largely responsible for the fall in profits of India Inc on a sequential basis. Due to robust profits from upstream oil, IT and metal companies, the effect of OMC losses got largely neutralized.

Sectors with robust growth in sales and profits

Since we are looking at a sectoral trend, we have considered only standalone numbers and not consolidated numbers as it could distort the sectoral picture. There were a number of sectors that flattered in terms of sales growth and net profit growth.

·         Automobiles and ancillaries were the star of the quarter. Sales grew at 45.3% while profits grew by 96.1% yoy. It was a combination of cost controls, inventory efficiency gains, price hikes and the comfort of chip shortages getting addressed.

·         Capital Goods saw 44.9% growth in sales and 351.2% growth in net profits. This sector saw benefits of a gradual revival in the capital cycle with overflowing order books and reduced cost of execution boosting their bottom lines.

·         Chemicals was another major sector with 52% growth in sales and 54.5% growth in net profits. Chemicals have seen much better pricing power amidst repeated lockdowns in China. Also moving up the specialty chemicals value chain helped numbers.

·         Banks were the surprise package. Top line revenues of banking were up 10% but profits got a boost of 36.9%. Even as loan growth is just picking up, the sharp reduction in provisioning, lower slippages, reduced gross NPAs, lower cost of funds and higher yields on loans have all helped banks surprise the street in Q1FY23.

·         FMCG sector deserves a special mention here. Sales for the sector were up 26.8% while the net profits were up 17.6%. Companies handled input costs better through inventory tweaks while price hikes were calibrated to cover costs, without burdening customers.
There were also other contributors to the profit story in Q1FY23 and that included sectors like logistics, media, upstream oil and paper. The message is that the intense pressure of input inflation may not be done yet, but its deleterious impact is surely waning.
Some  sectors flattered on revenues but faltered on profits
A number of sectors did well on sales growth but the cost pressures impacted profit growth. Here is a quick take.
·         Cement was a classic example, where the top line sales were up 28.2% but the net profits fell by -18.3% yoy. That was largely due to a sharp spike in power and fuel costs in the quarter, even as packaging and freight costs continued to soar

·         Metals was another sector that disappointed. Sales for Q1FY23 grew 31.7% on a yoy basis but net profits for the quarter were down -19.6%. Globally, commodity prices have eased, but the cost of manufacturing continues to be elevated, leaving a huge gap.

·         Downstream oil and gas was a problem segment. Despite record GRMs, the marketing margins were deeply in the negative as the OMCs were selling petrol and diesel at a loss. While upstream oil made profits, downstream oil made hefty losses of over Rs18,000 crore. With Brent Crude hovering around $100/bbl, this problem is here to stay.

·         Finally, telecom and textiles were the other 2 sectors that saw compression in profits despite higher sales. Both the sectors saw a spike in operating costs in the quarter and that is reflected in profit pressures.

Earnings may be interestingly poised

In the March quarter, the pressure came from working capital. Q1FY23 still betrays margin pressures but there are several positive triggers.
The levels of inflation may have peaked, rupee may have topped out and the FPI selling may have bottomed. As order flows resume in next few weeks, sales and profit momentum could return. After 3 consecutive quarters of margin pressures, Q1FY23 has finally shown some optimism that the worst on earnings pressure may be over. That is the good news!
ad IconAd Image

Key takeaways from Q1FY23: IIFL Securities

  • India Infoline News Service
  • 16 Aug , 2022
  • 11:46 AM
Overall growth

For Q1FY23, on a 3-year CAGR basis, aggregate Sales/Ebitda/PAT growth was 16%/10%/17% (PAT includes financials). Sectors with decent PAT growth include Healthcare (56%), PSU Banks (45%) and Metals (41%) and Private Banks (27%). Analysts at IIFL Securities continue to like private banks, as the large private banks yet again reported robust loan growth (top 5 banks each reporting a loan growth of about 5% QoQ). PCR also maintained at 70-80% despite low provisions. GNPAs also seem to be trending down.

Margin pressures

Aggregate (Ex-financials), EBITDA margins fell from 16% in Q4FY22 to 13% in Q1FY23 i.e. by about 230 bps. The YoY compression is even steeper, with aggregate margins falling by 463 bps versus Q1FY22. Most sectors saw a QoQ and YoY margin compression, led by Commodities, Telecom, Utilities and Media.

Earnings downgrades

Majority of the sectors have seen earnings cut during the current result season, with an aggregate PAT cut of 5% (6.5% since March 2022). Sectors with major downgrades include OMCs, Upstream O&G, Building Materials and Telecom. Companies with estimated FY23 EBITDA margins still significantly above the FY16-22 (excl. FY21) average, are IRCTC, Indian Hotels, Natco Pharma and Jubilant.
On the other hand, companies that analysts at IIFL Securities would like to highlight with estimated FY23 margins well below recent average include NMDC, Alembic Pharma, GSPL, and Tata Power. 

How Q1FY23 will pan out for Indian companies?

  • India Infoline News Service
  • 11 Jul , 2022
  • 11:55 AM
The results saga, as is the general practice, has begun with TCS on 8th July. The June quarter was always going to be challenging for the IT sector and the signals of stress are already visible. In the June 2022 quarter (Q1FY23), TCS reported 5% growth in net profits on a yoy basis. However, the real concern was the spike in the attrition rate at TCS to 19.7%. That only means that the attrition would be much steeper for most of the other IT companies. TCS does not provide forward guidance, but the review is good enough. Let us now turn to the overall Q1 results picture at a macro level and later at a sectoral level.

The big picture and how it looks ahead of Q1FY23 results?

The macro picture almost looks similar to what it looked like when the March 2022 quarter results had started trickling in. The 4 major challenges still remain. Firstly, there is the risk of commodity inflation. It has tapered in the current quarter, but still elevated. Secondly, the Russia war and the China COVID restrictions pose the two biggest risks to the supply chain of global companies. Thirdly, companies have to prepare for an era of higher yields and higher cost of funds and that is already manifesting in the June 2022 quarter. Lastly, there is the added risk that too much of hawkishness by the central banks may eventually translate into a recession. That will result in a lot of demand destruction across sectors.

However, on an optimistic note, many of the constraints above are not as bad as they were at the start of the June 2022 quarter. For example, the inflation in food grain, crude oil and industrial metals are all sharply down in the last couple of months. Secondly, if the inflation pressures taper sharply, it is very likely that most central banks may do a rethink about being too bullish. There is one more point to remember. In the last 3 quarters, India companies managed the headwinds through cost cuts, lowering inventory lock-ins, better creditor and receivables management etc. These benefits are largely saturated and the scope for further improvement is limited from here on. Here is a quick sectoral view.

1.      Oil companies could see a return to reality

Oil extraction companies are likely to gain from higher average oil price per barrel. However, the recent imposed windfall gains may be a problem for the coming quarters. The same applies to refining companies as the higher GRMs will be offset by higher duties on export of oil. Downstream oil companies could still be under pressure as the price hikes have not been in tandem with the spike in crude prices. The upstream oil companies like ONGC and Oil India are likely to be the best performers in Q1FY23.

2.      FMCG could see back-ended benefits of lower input costs

The benefits of widening operating profits in this quarter could be visible after a long time. The major FMCG companies have all raised their market prices but now the input costs of most agricultural inputs and even crude have fallen sharply. Lower inflation with elastic pricing is likely to translate into better than expected performance by FMCG companies in this quarter. Most of the FMCG companies are likely to see higher operating costs but that is likely to be largely offset by higher spreads on most of its products. The larger FMCG players stand to gain more than the mid-sized FMCG players.

3.      Autos could be the surprise pack of Q1FY23

Make no mistake, the auto sector has already been a surprise package in terms of price performance. At a time when the index was down about 8% in the June 2022 quarter, the BSE auto index is actually up by 16%, providing a tremendous outperformance. There are several things that have worked for the auto companies in Q1FY23. For instance, the price of steel, aluminium and copper have gone down and that is having a salutary impact on auto companies. Auto numbers have been robust on the back of greater vehicle affordability and an improvement in rural demand. While the second quarter could see more traction, the first quarter Q1FY23 will also see some benefits of growth and profitability spilling over from the previous quarters.

4.      Steel and aluminium may face a double whammy

Let us remember that the demand for steel would still remain robust. There may be some delay in construction and infrastructure projects but the broad demand from auto, electrical goods and FMCG products are likely to remain robust. The problem for steel is on the price front with the steel prices having already corrected over 20% from the recent peaks. In addition, the export duties levied on steel is already hitting the export demand for steel, especially from the EU region. On the positive side, the cuts in duties on ore and coking coal will be a positive but this is likely to be a pressure quarter for the metals sector.

5.      Banks could be the quiet performers in Q1FY23

What exactly could be positive for the Indian banks and financials? According to the ground reports, credit growth has been picking up momentum while the higher bond yields is likely to expand the NIMs of the banks. The private sector banks are expected to have done better than the PSU banks and are likely to report stronger profit growth in the June 2022 quarter. At the same moderate credit costs will come to the rescue of the banks and help them widen the spreads. However, analysts have warned that most banks could face subdued treasury income with higher operating costs hitting profits. However, private banks are expected to have done better than the PSU banks in Q1FY23.

6.      It is likely to be a mixed bag for the IT sector

The IT sector in Q1FY23 is likely to see robust growth in the top line. However, the bottom line is likely to suffer on account of higher manpower, offshoring and travel costs and higher attrition related expenses. The first company to announce quarterly results for Q1FY23, TCS, has also shown a spike in attrition rates to 19.7%. Most IT companies see an improvement in deal execution in Q1 and that is likely to hold the top line growth in good stead, combined with a greater focus on new age technologies. However, higher manpower costs, higher travel costs and spill over effects of attrition are likely to keep IT margins under pressure in Q1FY23.

One broad trend we could get to see in Q1FY23 is the weight of performance shifting from the pure commodity plays to the user industries. That should be a positive shift.


Image not found
  • 16 August, 2022 |
  • 10:47 AM

Q1FY23 saw an aggregate PAT growth of 17% on a 3-year CAGR basis for a sample of 437 BSE 500 companies. Excluding financials and commodities, PAT growth was 15% on a 3-year CAGR.

ad IconAd Image