Friday, June 10 2022
Macro image looks encouraging on sales

If you were to take the 2,900 companies that have announced their results so far for Q4FY22, the sample is broadly representative of the picture of Indian companies as a whole. Let’s look at the top line first. Sales revenue increased 25.8% year on year for Q4FY22, which can largely be attributed to the price effect. With rising raw materials driving up input costs, firms with pricing power have managed to pass on rising input costs to customers. Some of the key sectors with pricing power include automotive, paints, FMCG, etc.

However, sales on an annual basis tend to mask the high frequency short-term trend in sales revenue. Therefore, we also look at sales growth on a sequential basis, i.e. on the December 2021 quarter. On a QOQ basis, sales grew by around 9%, which is impressive. However, what stands out is the sharp drop of -43% in other income. This may be due to lower yields on debt securities, which may have affected corporate treasury yields.

The macro picture is mixed in terms of profitability

The other parameter to look at is profits. Since input costs are the main issue this quarter, we are looking at both sides of earnings. We look at gross profit, i.e. the profit generated by the basic manufacturing operation. We also look at net profit or bottom line for an overall picture. Let’s look at gross profits first.

On an annual basis, gross profits increased by 16.2%, while gross profits were higher on a QOQ basis by around 5%. However, the pressure was evident in the margins. On a yearly basis, gross margins decreased from 13% to 12%, while on a QOQ basis, gross margins decreased from 12.4% to 12%. The global commodity price boom has put pressure on input costs. This results in lower gross margins.

What about net profits. India Inc’s net profit increased by 26.9% on an annual basis and 12.1% on a QOQ basis. The rise in earnings was largely driven by upstream steel, aluminum and oil; where rising commodity prices led to a flattering performance. Even if you look at net margins for Q4FY22, it’s up 10 basis points to 10.55 on a yearly basis and it’s also up 30 basis points on a QOQ basis. Pressure on gross margins was more than offset by lower interest charges and lower taxes. Interest charges were down due to lower rates and a deliberate strategy by large corporations to reduce debt.

Sectors that have flattered the top line and the bottom line

Since we are looking at a sectoral trend, we have only considered stand-alone figures and not consolidated figures, as this could distort the sectoral picture. There were a number of sectors that flattered revenue and bottom line.

· Sales of automobiles and accessories increased by 5.5% while profits increased by 35.4%. It was a combination of cost controls, inventory efficiencies as well as leverage with companies to pass on input cost increases through higher prices.

· Capital goods recorded 14.1% growth in sales and 48.3% growth in net profits. This sector benefited from a gradual recovery in the capital cycle even as operating margins on capital goods improved during the quarter.

· Chemicals was another strong sector with sales growth of 38.3% and net profit growth of 46%. Chemicals saw much better pricing power as sourcing from China continued to face supply chain constraints. This boosted the earnings of these stocks.

· Finally, media and entertainment companies recorded 27% growth in sales and 92.5% growth in net profits. With the return to normal, most media saw strong growth in subscription and advertising revenue, leading to better spend absorption.

Some of the other big absolute contributors to earnings growth were upstream metals and oil. However, in both cases, earnings growth did not keep pace with sales growth due to higher operating and input costs in the quarter. Banks reported improved earnings, but this was more due to lower provisioning in the quarter.

Sectors that have flattered turnover but have weakened in terms of results

In fact, several sectors performed well in terms of sales growth, but cost pressures impacted earnings growth. Here is a quick overview of some of them.

· Cement was a classic example, where sales increased 6.6% but net profit fell -20.6% year-on-year. This was largely due to a very sharp increase in electricity and fuel costs during the quarter, although the intensity of the pressure exerted by raw materials and freight eased.

· Consumer durables was another major segment where sales increased 9.8%, but net profits fell -25.8% year-on-year. While input costs were significant, the real pinch came from the sharp increase in logistics costs for these companies.

· Downstream oil and gas was a key segment. Oil refining and marketing inventories were hit despite better refining gross margins. The blow came from shrinking petchem margins and also low marketing margins on static gasoline and diesel prices.

· Finally, telecommunications and textiles are two other sectors that have experienced a compression of profits despite higher sales. Both sectors experienced a spike in operating costs in the quarter, which is reflected in earnings pressures.

The real story is in the working capital

If one were to look at the income statement without looking at the cash flow statement, chances are you would miss the most critical trend. In FY22, net cash from operations fell almost in all Indian manufacturing companies. There are several reasons for this trend in FY22.

For starters, trade receivables increased amid payment delays in the market. Second, small and medium-sized businesses are seeing a decline in credit through trade payables, which is putting pressure on operating cash flow. Crucially, most companies have tied up more of their funds in inventory as they grapple with supply chain constraints. This may be the true story of Indian companies’ Q4FY22 Q4 earnings.


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