Friday, 03 February 2023

India's earnings for Q4 probably show the inflation lines

India's earnings for Q4 probably show the inflation lines

Suppose one has followed the gyrations of the equity markets in FY22. In that case, 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 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. Banks, oil and gas companies, utilities, metals and mining, and consumer durables would lead this robust growth.

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. The pick-up in economic activity would reduce stressed assets, further boosting 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 oil prices and other vital commodities such as steel will shine on companies that supply these. For instance, upstream oil and gas companies would gain higher realizations, while downstream companies would get a boost from higher refining margins. Steelmakers would also benefit from higher realizations, although weak domestic demand could check operating performance somewhat.

India earnings for Q4 probably show the inflation lines 1pixabay image

Read More: India's Trade deficit expands by 87.5% to a record $192

The excellent 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, many 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 drag.

"Gross margin is probably to remain under pressure, with significant improvement likely only beyond 1HFY23," noted Motilal Oswal Financial Services Ltd analysts. They add that some companies have been forced to pass on higher costs to consumers through price hikes, which may impact revenue growth.

Perhaps the biggest brunt of inflation and the supply disruption would be borne by automobile companies. Kotak analysts expect automakers to report an 18 percent decline in EBITDA (earnings before interest, tax, depreciation, and amortization) 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.

IT companies are expected to report significant earnings among services, 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.

Ajit Mishra, vice president -of research at Religare Broking said

"Further, revenue is expected to be strong for IT companies on a steady demand; however, employee cost and attrition will be key monitorable,"

At the receiving end of inflation, sectors may drag down listed companies' overall profit and revenue growth. 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 have kept up the pressure on companies' revenues, 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.

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