Q3 earnings trends indicate robust recovery for India Inc

Early earnings signal that India Inc. has put up a good show, recovering from the coronavirus turbulence with a strong focus on the balance sheet, cash flow and expenses.

Analysts, however, said that as things begin to normalise and supply-side issues are ironed out, margin improvements reported in the quarter will likely moderate.

Aggregate net profit growth surged 57.8% from a year earlier in the December quarter—the highest in 10 quarters—from 8.99% growth in the September quarter and a drop of 1% in the corresponding quarter last fiscal. Net profit was adjusted against one-time profit or loss. The review excludes banking, financial services, insurance and oil and gas companies.(Livemint/Capitaline)

A Mint analysis showed net sales of 166 BSE-listed companies grew 10.47% from a year earlier during the fiscal third-quarter—a seven-quarter high. That compares with a 3.34% gain in the preceding September quarter and 1.57% increase in the December quarter of 2019, according to data provider Capitaline.

Aggregate net profit growth surged 57.8% from a year earlier in the December quarter—the highest in 10 quarters—from 8.99% growth in the September quarter and a drop of 1% in the corresponding quarter last fiscal. Net profit was adjusted against one-time profit or loss. The review excludes banking, financial services, insurance and oil and gas companies.

To be sure, these are early trends, and typically, companies with weak performances declare their results towards the end of the earnings season. Analysts are, however, confident that the December quarter will throw up better-than-average growth in earnings.

Deepak Jasani, retail research head at HDFC Securities, said that despite an increase in raw material costs and employee expenses, early earnings from India Inc. indicate margins have either remained stable or risen a little during the quarter due to pricing power, as the raw material price rise is currently being fully passed on to customers due to production and movement constraints.

However, he added that once these constraints are eased or completely eliminated, margins could come under pressure.

“Key would be when would this happen as then the unorganized sector will be in a better position to compete with the organized players and bring down overall prices and margins,” Jasani said.

Prices of major commodities such as crude oil, aluminium, copper and zinc prices have surged during the December quarter. Crude prices rose 26.5%, while aluminium, copper and zinc jumped 14-16%.

Increase in major metal prices has benefitted metal companies, particularly steel.

According to Crisil, domestic steel prices gained from the convergence of three tailwinds: high global steel prices, tight domestic supply due to iron ore shortage, and healthy demand growth.

The rating agency also said that large steelmakers, excluding those from the public sector, are expected to clock an impressive 8 to 10 percentage points improvement from a year earlier in earnings before interest, taxes, depreciation and amortization (Ebitda) margins in the fiscal second half, riding on a 35% jump in domestic steel prices, 30-35% drop in coking coal prices and surging demand.

Rusmik Oza, executive vice president, fundamental research head at Kotak Securities, said the high demand for steel seen in the December quarter led by festivals will normalise this quarter, while benefits of cost savings and lower raw material costs will fade away.

Hence, gross margins of most manufacturing companies may compress in the March quarter as commodity prices have risen sharply in the last three months of 2020.

“Q4FY21 earnings could disappoint, but then the first two quarters of FY22 would report abnormally higher earnings growth because of the abysmally low base of FY21. We are expecting earnings of Nifty-50 to grow by 29% in FY22 on the back of 12% earnings growth expected in FY21,” Oza said.

Meanwhile, analysts say that growth will continue in FY22 because of the progress in covid vaccination and continuous improvement in the economy from last year’s lockdown.

“We believe as the economy gets back to pre-covid production output and business resumes to normalcy, a sustained earnings revival is on anvil. In line with the recovery theme as the economy returns to a mid-to-high growth environment, several domestic cyclicals are likely to be beneficiaries of the new growth cycle. The last two years have seen a large degree of cost optimisations and deleveraging play out and should further add a material fillip to growth stories in the post covid environment,” said Jinesh Gopani, head of equity at Axis Mutual Fund.