Major themes emerging from the Q2 results
Some of the Q2 result themes like margin pressures and higher demand are already well known. Here is a quick summary of the Q2 story.
- The combination of COVID related restrictions and the surge in vaccinations in Sep-21 quarter ensured that demand across sectors was robust.
- Sectors with a commodity focus like steel, aluminium and oil & gas were the star performers as they gained from strong demand and robust prices.
- However, the spike in raw material costs resulted in sectors like specialty chemicals, FMCG products, cement and autos come under pressure.
- There were sub-trends. Sectors like paints and FMCG bore the brunt of input costs. Then, sectors like cement felt the pain of higher power and freight costs.
- EBITDA margins or core operating margins fell 80 basis points on a sequential basis. However, lower interest costs allowed 200-300 bps expansion in net margins.
- IT companies took a hit on operating margins on account of spurt in attrition levels resulting in sharply higher manpower costs. Autos also suffered from chip shortage.
Let us first look at the yoy numbers for the Sep-21 quarter compared to Sep-20. On a yoy basis, the total top line sales revenues for non-financial players was up 36%. Operating profits did come under pressure due to higher input and power / freight costs. However, the net profits were up 54.4% yoy on the back of a sharp 6% fall in interest costs.
We now turn to the sequential qoq view. Compared to Jun-21, the sales revenues were up 15.4%, while operating profits once again came under pressure. However, even in the sequential story, lower interest costs helped net profits grow 37.2%. Overall, the momentum, despite the supply chain bottlenecks, is still strong and robust.
Which sectors impressed in the Sep-21 quarter?
This is sectoral analysis which we shall break up into several sub-segments. We first look at the segments that saw fall in revenues but an improvement in profits. That space belonged to the banks and financials. For example, banks saw revenues falling -1.1% due to lower interest yields on loans and investment. However, the profits of banks were up 30.8% due to lower provisioning for doubtful debts and lower impairment charges for financials.
There were a number of sectors that did extremely well on the top line and the bottom line. One sector that fits this bill is the automobiles and the auto ancillary space. This segment saw sales grow by 21.7% but profits were up 39.5% yoy. That is largely because auto companies passed on most of the cost spikes to end customers via price hikes. Metals saw sales up 67% while profits were up 283% yoy.
Capital goods also saw robust growth of 31% in top line and bottom line as overflowing order book positions took care of profits. Insurance was another sector that saw revenues growing at 2.2% but profits growing at 19.7% as the pressure of COVID claims fell sharply in the quarter. Media was the last of these flattering sectors with sales growth of 20% and profit growth of 133% as a sharp revival in ad revenues gave a boost to profits, even as subscriptions lagged.
Which sectors faltered in the Sep-21 quarter?
We now turn to the sectors where profit growth could not keep pace with sales growth due to input cost pressures. There were a number of sectors in this list. Chemicals saw 33.5% growth in sales but profits were up just 10% due to input cost pressures. FMCG also saw 19% growth in sales but just 14% growth in profits due to crude oil price pressures. In the case of IT sector, revenues were up 19.4% but profits were just up 10.3% as higher attrition and manpower costs hit these companies.
Finally, we look at companies that saw negative profit movement. Healthcare is a sector that saw 12.5% growth in revenues but -10.5% fall in profits as sharply higher operational costs could not be absorbed. Infrastructure is another sector that saw 22% rise in revenues but -62.2% fall in profits due to supply chain bottlenecks. There was also the textiles segment that saw revenues grow by 70.6% while profits fell by -38.2%, again on the back of supply chain bottlenecks and higher input prices.
Overall, it has been a quarter, wherein India Inc has managed to see top line recovery but profits came under pressure due to input costs, power and freight spikes. Overall, the Sep-21 has not only grown yoy, but also maintained sequential momentum.