Early bird Q4 results hint at slowdown for India Inc in upcoming quarters

Though sales surged 15.1% YoY in Q4, the growth was slower sequentially

The early bird results for the January-March 2022 quarter (Q4FY22) hint at a slowdown in corporate sector growth in the upcoming quarters. The combined net sales of the 81 early bird companies in the Business Standard sample were up 15.1 per cent year-on-year in Q4FY22; this was less than the 15.9 per cent YoY jump reported in Q3FY22.

The slowdown could be much stronger for the domestic market-focused companies, including those in the banking, finance, and insurance (BFSI) space.

The combined net sales of 70 early bird companies, excluding IT services exporters, were up 11.5 per cent YoY in Q4FY22, slower than the 12.6 per cent YoY growth reported in the previous quarter and only marginally better than the 11.3 per cent YoY growth in Q4FY21.

The companies in the sample reported combined net sales (interest earned in the case of banks) of Rs 2.23 trillion in Q4FY22, against Rs 1.94 trillion a year ago. Their combined net profit during the period was up from Rs 35,276 crore to Rs 43,930 crore.

IT services exporters, such as Tata Consultancy Services (TCS), Infosys, and HCL Technologies, which dominate the early bird sample appear to have maintained their growth momentum. These companies account for nearly half the combined revenues and net profit of the early bird sample.

The combined net sales of the 11 IT services companies in the sample were up 18.5 per cent YoY in the fourth quarter, down from 19 per cent in Q3FY22. These IT companies’ top-line growth in Q4FY22 was, however, nearly twice the 9.3 per cent YoY growth reported by them a year ago.

With respect to earnings, companies across sectors continue to face margin pressure because of faster growth in operating expenses, such as salary & wages, and raw material and energy costs. The operating or Ebitda margin of 70 non-BFSI companies was down nearly 200 basis points on a YoY basis in Q4FY22.

Yet, these early birds managed to report 24.5 per cent YoY growth in net profit in Q4FY22 because of savings on fixed costs, such as interest and depreciation; banks once again gained from a sharp decline in provisions for bad loans.

There is, however, a sharp moderation in the overall profit growth, if ICICI Bank and HCL Technologies numbers are excluded from the sample. These two emerged as the top performers during the fourth quarter.

While ICICI Bank net profit was up 59.4 per cent YoY in the fourth quarter, HCL Tech reported a 224 per cent YoY jump in its net profit. 

Excluding these two, the combined net profit is up only 11.9 per cent YoY in Q4FY22; growth in net profit (adjusted for exceptional gains & losses) at 10.9 per cent is the lowest since June 2020 quarter. But analysts are cautious about reading too much in the early bird result, given the small sample size.

These early-bird companies account for only 17 per cent of the market capitalisation of all the BSE-listed companies. On the earnings side, these firms account for only 18 per cent of all listed companies’ net profit and just 2.13 per cent of their combined net sales.

Still, analysts point out that the fourth quarter results of industry leaders -- such as TCS, Infosys, HDFC Bank, and Nestlé India -- suggest a big downgrade in India Inc forward earnings for FY23 and FY24. “The Q4 earnings of key companies’ point to the growth and margin challenge that lies ahead of India Inc. Analysts have begun to scale down their earnings forecast for FY23 and I expect up to a 20 per cent cut in Nifty50 companies’ earnings per share estimate for FY23,” says Dhananjay Sinha, MD & chief strategist JM Institutional Equity.

Before the start of the Q4FY22 earnings season, brokerages expected 25 per cent YoY growth in Nifty50 companies’ earnings in FY23. Brokerages expect companies, such as ICICI Bank and HCL Tech, to outperform their peers based on their Q4FY22 results.

"ICICI Bank is well positioned to undergo a swift re-rating over FY23, generating strong returns for investors, as it continues with its journey to deliver solid return ratios and growth," write Nitin Aggarwal and Yash Agarwal of Motilal Oswal Securities.