Early birds hint at subdued earnings growth in December quarter

Net profit up 10.4% YoY, growing at slowest pace in five quarters

Corporate earnings in the December 2021 quarter (Q3FY22) have started on a muted note for India Inc with lower than expected growth shown by early-bird companies. The combined net profit of 140 early-bird companies is up 10.4 per cent year-on-year (y-o-y) during October-December 2021, growing at its slowest pace in the last five quarters.

For comparison, these companies’ earnings were up 19.7 per cent y-o-y in Q2FY22 and 21.6 per cent during the third quarter of FY21. Early-bird companies reported net profits of around Rs 43,500 crore in Q3FY22, up from Rs 40,565 crore in Q2FY22.

On the top line side, their combined net sales (gross interest income in the case of banks and other lenders) were up 16.5 per cent year-on-year in Q3FY22, growing at the slowest pace in the last three quarters and down from 25 per cent y-o-y growth in the second quarter of the current financial year.

The slowdown in earnings has been attributed to IT services exporters such as Tata Consultancy Services (TCS), Infosys, Wipro, and HCL Tech, which dominate the early-bird sample. These tech companies together accounted for 55 per cent and 53 per cent of the combined net profits and net sales of the early-bird sample combined numbers, respectively.

The combined net profits of 16 IT companies in the sample were up 6.9 per cent y-o-y in the third quarter, down sharply from the 14.3 per cent in the second quarter. In contrast, the industry’s combined net sales were up 20.6 per cent y-o-y in Q3FY22, growing at the fastest pace in at least four years.

“The IT industry faces margin pressure with a sharp rise in employee costs. This could stay for a few quarters more, given the high employee attrition in the industry,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.

Expenditure on salaries and wages for the IT sector was up 21.3 per cent y-o-y in Q3FY22, outgrowing the revenue growth for the second consecutive quarter.

Employee cost is the single-biggest cost head for IT companies, accounting for 72 per cent of their operating expenses and equivalent to 53.8 per cent of their net sales in Q3FY22. Others, however, say India Inc earnings’ growth is now normalising after an exceptional performance in the last few quarters.

Note: BFSI: Banking, financial services, and insurance firms Source: Capitaline; Compiled by BS Research Bureau

“A sharp rise in corporate earnings in the second half of FY21 and first half of FY22 came from non-recurring factors such as higher commodity prices and record low interest rates rather than higher volume growth. These factors are now unwinding, leading to a decline in earnings growth,” said Dhananjay Sinha, managing director and chief strategist, JM Institutional Equity.

This unwinding is visible in the number of banks, financial services, and insurance (BFSI) companies. There was a y-o-y rise in interest expenses of the BFSI companies in Q3FY22 after five consecutive quarters of decline in line with a rise in bond yields (or interest rates) in recent months.

Higher interest cost translates into lower net interest margins and profits in the BFSI space and vice versa.

BFSI companies are the second-biggest segment in the early-bird group, accounting for nearly a third of the combined net profits.

The non-BFSI and non-IT companies also reported a slowdown in earnings growth. The combined net profit of the non-BFSI and non-IT companies was up just 0.7 per cent y-o-y in Q3FY22, down from 38.2 per cent in Q2FY22. Similarly, growth in their combined net sales declined to 14.1 per cent in the third quarter from 23.9 per cent in Q2FY22.

Some analysts, however, say it’s early to reach a conclusion about the earnings trajectory, given the small sample.