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Hit by the Omicron wave, sharp increase in raw material prices, shortage of components and subdued demand in rural markets, corporate profits for the March 2022 quarter will be a mixed bag.

A robust showing by banks on the back of good top line growth and lower loan provisions, higher realisations for upstream oil companies and large gains for downstream oil players will boost aggregate earnings. However, profits of a clutch of key sectors –auto, cement, consumer staples – would be subdued. In fact, if banks, oil & gas and the consumable fuels sector were to be excluded, the growth in the Sensex’s earnings, analysts say, could slip into high single digits.

While corporate India’s balance sheet has been deleveraged over the past couple of years, and most are in good shape, there are some signs of stress. One study of 1,789 companies (excluding financials) showed that 51% of this universe reported a fall in the interest cover for the nine months to December 2021. These businesses were primarily in sectors such as communications, gems and jewellery, sugar, paper and textiles. With the economy opening up, some of this stress should abate.

Meanwhile, inflation in commodities will hurt gross margins for FMCG players, leaving a modest profit growth even as revenues for the sector are estimated to grow in high single digits. Interestingly, most companies have either taken price hikes or are contemplating them, suggesting they are confident volumes won’t fall too much. For the March quarter, revenue growth would be led largely by price hikes and volumes should either stay flat or increase marginally.

Demand for consumer staples is understood to have been particularly muted in rural India. Against this backdrop, an update from Marico showed demand had held up reasonably well in the fourth quarter on a high base that would leave volume growth marginally better. A tepid show from Titan – recurring sales of jewellery were flat year-on-year in the March quarter – has been attributed to sharp rise in prices of gold in March. Godrej Consumer Products expects to deliver a double-digit sales growth in the quarter led by better pricing.

The shortage of chips and high raw material costs will pressurise profit margins of automobile manufacturers. Revenues could remain flat, despite better realisations as production volumes would be hurt especially in the passenger volume segment. Data shows two-wheeler sales have been weak primarily due to high ownership costs. However, there has been some recovery in the commercial vehicle segment.

A relatively dull demand environment, tougher with elevated fuel and power costs, would leave profits of makers of construction materials somewhat subdued. Producers of metals should report strong revenues but profit growth could be less exciting – in single digits — partly due to a base effect and partly due to higher coal prices. However, indicative volumes from realty suggest they have done fairly well.

Although demand remained strong, driven by spends on digital needs, analysts believe IT services companies may have realised only modest price increases in the fourth quarter. Consequently, the higher-than-usual wage hikes – both onsite and offshore – , lateral hiring as well as the hiring of freshers in large numbers, could leave ebit (earnings before interest and tax) margins of IT services firms under pressure. That’s despite help from a weaker rupee. In a typically weak season for the industry, analysts estimate ebit margins could fall by 170-350 bps y-o-y and 10-70 bps sequentially for the top tier firms.

Given the roughly 50% increase in crude oil prices since the December 2021 quarter, inventory gains would likely outweigh the marketing losses of oil marketing companies. For upstream oil companies, the higher crude oil prices would boost profitability as would strong refining spreads.

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Author: Howard Caldwell