Inflation to weigh on first-quarter profit margins; cooling commodity prices to be reflected in second-quarter numbers

by Jul 12, 2022Economy0 comments

Automotive companies’ earnings are expected to fall slightly quarter-over-quarter mainly due to chip shortages that affected PV production volumes and also a drop in commercial vehicle volumes due to the effect of seasonality.

With many companies expected to report a sequential drop in earnings, the June quarter earnings season is expected to be dull. From automobiles and banks to building materials and metals, most sectors have been adversely affected by runaway inflation, rising interest rates, rupee depreciation, and high commodity prices.

While demand held up fairly well and the services sector saw a big rebound in June, supply-side shortages and high raw material costs affected output and margins, respectively. Sales and earnings figures, of course, will look very good compared to the weak June 2021 quarter, when business was severely affected by the second wave of Covid-19. The benefits of cooling commodity prices would be seen in the September quarter results.

Net earnings for the universe of stocks tracked by KIE are estimated to fall by 16% quarter-on-quarter (q-o-q); for BSE 30 companies, they are estimated to fall by 10%, and for Nifty50 by 11% sequentially.

Automotive companies’ revenues are expected to fall slightly quarter-on-quarter mainly due to chip shortages that affected PV production volumes and also a drop in commercial vehicle volumes due to the effect of seasonality.

The recovery in two-wheeler volumes along with an increase in average consumer spending should boost the figures.
However, high commodity prices would have affected operating profits, which are expected to decline sequentially.

The consumer goods package is very mixed, but most companies are expected to report reasonably good volumes, despite high inflation. Value growth would be strong and should be in double digits for most companies, especially year over year. However, gross margins would be under pressure, despite price increases, and would weigh on the profitability of most stable and discretionary businesses.

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Meanwhile, demand for consumer durables, while quite strong in April and May, thanks to the severe summer, moderated somewhat in June. “Price increases were minimal and limited to a few products, and the premium segment was relatively less affected than the mass segments,” noted one analyst.

Cement manufacturers were reportedly hurt by higher fuel costs (petroleum coke and thermal coal), as well as higher freight costs. As a result, despite better realizations, Ebitda (earnings before interest, taxes, depreciation, and amortization) per ton is expected to have fallen by 10-12% quarter-over-quarter.

Software companies’ margins are expected to have contracted sequentially, by 100-400 bps, thanks to rising retention costs, driven by increased attrition and also higher travel expenses. At TCS, for example, Q1FY23 Ebit margin fell to a multi-year low, dropping 190 bps sequentially to 23.1%. The impact of the salary increase alone was 150 bps.

While net interest income should have seen a nice uptick with increased loan growth, heavy treasury losses would reduce banks’ earnings. Bottom-line results would receive a boost from falling provisions for credit losses. Upstream oil and gas businesses will report good earnings growth: average Brent prices crossed the $110/barrel mark, up $9/barrel from the end of March. However, OMCs are likely to report low numbers and may even post losses due to the under-recovery of auto fuel and LPG.

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