With softening commodity prices and rising consumption, analysts expect the overall corporate performance to improve in the second half of the fiscal year.
The aggregate revenue of a sample of 2,638 listed companies, excluding banking and finance firms, increased by a four-quarter high of 41.5% on-year in April-June. But growth in net profit was at a four-quarter low of 15.1%. “Aggregate performance came in below expectations due to a miss in some of the heavyweights like
, and substantial losses in OMCs (oil marketing companies),” said Gautam Duggad, institutional research head at . He said the spread of earnings was, however, better with 70% companies covered by the brokerage either meeting or beating expectations.
According to HDFC Securities retail research head Deepak Jasani, results for top 100 companies were in line with expectations, but were disappointing for medium and small companies, largely on the margin front. “This denotes absence of pricing power for mid and small players,” he said.
The sample’s operating margin dropped 3.1 percentage points year-on-year to an eight-quarter low of 13.9% in the June quarter amid higher input costs. The share of raw material costs in revenue increased to 39.2%, the highest in at least 13 quarters. “June ’22 quarter results suggest margin pressure across the board due to inflationary pressures in the form of higher raw material, fuel, power and wage costs,” said Jasani. However, cost pressure has started receding. “We expect margins to improve from hereon given the correction in commodity prices since May ’22,” said Duggad of Motilal Oswal. According to him, margins would also benefit from the spillover impact of increased product prices.
On the sector front, the performance was a mixed bag. The banking and finance sector reported a better show following higher loan disbursement, lower provisioning for bad assets, and improved collection efficiency. After including the banking and finance companies into the sample, the aggregate net profit increased by 20.1%, while revenue grew by 34.5% year-on-year. Other sectors that showed improvement were cement, chemicals, consumer goods, paints and real estate. Sectors including automobiles, metals, and oil and gas reported disappointing numbers.
While the September quarter may show seasonal weakness amid monsoon, analysts expect a better show in the second half of the fiscal. “As inflationary pressures are easing, there is hope of better performance in H2FY23, provided we do not have any other negative trigger by then,” said Jasani. Duggad said the strong performance by consumer discretionary sectors such as paints, jewellery, and quick-service restaurants reflected improving consumption. He also expects lenders to report better treasury performance amid softening bond yields. “Overall, we expect Nifty50 earnings per share to grow by around 15% for FY23,” Duggad said, while also highlighting potential concerns including volatile crude oil prices, monetary tightening and any spike in geopolitical tensions around Russia-Ukraine which may further hurt the supply chain.