What to expect from the Mar-22 Fourth Quarter corporate results?

18 Apr 2022 , 01:01 PM

The fourth quarter results have just about started trickling in with TCS and Infosys being among the large cap companies to have announced their results. In both the IT majors 3 distinct trends were visible. Firstly, the top line growth was robust on the back of greater digital conversion. Secondly, operating margins came under pressure due to higher operating costs, including manpower costs. Thirdly, the attrition rates have touched all-time highs for both the companies. For TCS attrition had touched 17.6% while in the case of Infosys it touched an all-time high attrition of 28%. In a way, this is likely to be the broad trend for other IT majors too, although smaller sized IT companies operate on a different set of economics.

How does the overall macro picture look like for Q4

The fourth quarter results for the period ended Mar-22 will be announced in the shadow of 4 major global events that are likely to act as major headwinds. There is the ongoing war in Ukraine as well as a rampant rise in input inflation across industries. The sharp spike in inflation has made most central banks extremely hawkish while COVID has made a comeback in China, once again threatening supply chain flows. It is in this background that the Q4 results are being announced by Indian companies.

For the universe of companies as a whole, the top line growth is expected to be robust but operating performance is likely to be hit by higher input costs. The average fall in the EBITDA margins for the fourth quarter ended Mar-22 is projected to be about 300 bps lower on a yoy basis and nearly 60 bps lower on a sequential basis. The trend of EBITDA contraction due to higher input costs has been visible since the second quarter, so Q4 will mark the third consecutive quarter of lower margins. Here is a sectoral gist.

1. FMCG companies could face a double whammy in Q4

Fast moving consumer goods companies have been under pressure for some time. In Q4, the FMCG companies are likely to be hit by two factors. On the top line, the growth is likely to take a hit on the back of weak rural sales. Even in Q3, rural sales had taken a hit but the trend is likely to get accentuated in Q4, as is evident from rising rural inflation. On the input side, the impact on EBITDA margins has been evident in the last 2 quarters as the cost of crude, chemicals, food related inputs etc have all rallied sharply in the last few months. With crude above $100/bbl through most of Q4, the impact is likely to be sharp on FMCG. The impact will be more on consumer staples and less on consumer durables.

2. Contact intensive sectors to benefit from opening up

We consider a much broader classification of contact intensive sectors encompassing airlines, hotels, quick service restaurants (QSR) etc. Most of these businesses have got back to full capacity operation only in Q4 and the impact of better fixed absorption should be evident in these cases. Of course, airlines will still face pressure from the sharp spike in aviation turbine fuel (ATF) costs. However, in all the contact intensive sectors, recovery in top line sales should be the big theme.

3. Automobiles will see neutralizing price hikes

The fourth quarter ended Mar-22 is likely to see volumes falling in the range of 12% to 16% on the back of production shutdowns due to supply chain damage and microchip shortages. However, this will be compensated by price hikes in the range of 18% to 22%. The net impact is likely to be a marginal 50 bps growth in top-line. However, the pressure on margins is likely to result in flat to negative profit growth as most of the input costs are sharply higher amidst the war situation.

4. Cement companies may face pressure on dual fronts

Cement companies are likely to see pressure on the top line and the bottom line. The tepid volume growth is likely to dampen the gains of better price realizations. This is likely to keep top line under pressure for cement companies. Cement companies are likely to face a lot of pressure on the bottom line due to a combination of higher fuel costs, steep rise in power costs and the impact of higher diesel prices on freight and logistics costs. This impact is likely to be back-ended due to the delayed hikes, but the pressure will be there nevertheless.

On the construction front, the realty companies are seeing record home sales amidst a low interest rate environment. However, margin pressure is likely to compress operating margins by up to 600 bps in the fourth quarter amidst higher labour costs, steep rise in material costs as well as higher sub-contracting expenses.

5. Steel and aluminium to still hold the fort on top line

It is estimated that for FY22, nearly 23% or one-fourth of the total revenue growth came from metals and mining companies alone. This was largely thanks to a spike in metal and ore prices on the LME resulting in better realizations. In Q4, steel sector revenues are estimated to have grown by 35% while the aluminium sector revenues are projected to have grown by a whopping 55%.

However, the margin picture on steel is likely to be far from flattering in Q4. The total impact on the operating margins of steel product companies is estimated at 800 to 900 basis points with the prices of coking coal and iron ore rallying much faster than the prices of finished steel. This is likely to put pressure on OPMs of steel companies in Q4.

According to a CRISIL report, it is estimated that out of the total number of sectors in India, nearly 70% of the sectors are likely to see pressure on operating performance in Q4, largely due to a spike in hard and soft input costs. While COVID lockdowns had already disrupted the supply chains, the recent invasion of Ukraine by Russia has worsened the situation. For most of the high value sectors, Q4 is going to be a difficult bottom line story.