OMCs pull down India Inc sequential profits in Q1FY23

17 Aug 2022 , 09:59 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!