Second Covid-19 wave, higher input cost set to weigh on Q1 earnings

Nifty50 firms' net profit expected to decline 10.1% QoQ

Lower sales volume due to the second wave of the Covid-19 pandemic and higher commodity and input costs are likely to weigh on corporate revenue and profits in the April-June quarter of 2021-22 (Q1FY22). The companies in the cyclical sectors, such as banks, non-banking financial companies (NBFCs), oil and gas and metal, and mining, are again expected to do much better than the other segments.

The combined net profit of Nifty50 companies is expected to decline 10.1 per cent quarter-on-quarter (QoQ) in Q1FY22, while their combined net sales are expected to decline 14 per cent QoQ during the quarter.

The earnings deceleration in the first quarter (Q1) could mark the end of earnings expansion in the post-pandemic period. The biggest impact is expected to be felt by companies in the non-cyclical sectors (excluding banks, NBFCs, energy, and metals).

Tata Consultancy Services, which reported its Q1FY22 earnings last week, failed to impress. Its net profit in Q1FY22 was around 3.3 per cent lower than brokerage estimates; its net sales was 1.3 per cent lower than estimates.

The net sales of the index company’s ex-cyclicals (banks, NBFCs, energy, and metals) are expected to be down 16.1 per cent QoQ, while their net profit is expected to be up 6.8 per cent QoQ.

The combined net profit of the non-cyclical index companies at around Rs 48,000 crore is expected to be the same as in the fourth quarter (Q4) of 2018-19 and much lower than the record high of Rs 75,600 crore in the third quarter of 2019-20 after the tax cut.

The analysis is based on the earnings estimates for Q1FY22 by brokerages, including Motilal Oswal Financial Services (MOFSL), Kotak Institutional Equities (KIE), YES Securities, Antique Stock Broking, IDBI Securities, and PhillipCapital.

A low base in Q1 of 2020-21 (FY21), however, means that India Inc may still post high double-digit growth in revenue and profit, aided by a sharp jump in industrial metals and energy prices in the last 12 months.

The index companies’ net sales are expected to grow 54 per cent year-on-year (YoY) to Rs 10.1 trillion in Q1FY22, while net profit is expected to be up 230 per cent YoY to Rs 11.19 trillion. The index companies had reported their highest-ever combined net profit of Rs 1.33 trillion in Q4FY21.

“India Inc will report a sequential decline of 8-10 per cent in revenue for Q1FY22, led by consumer discretionary products, such as automobiles, which saw volumes impacted by the lockdowns across states to contain the second wave of Covid infections,” says Hetal Gandhi, director, CRISIL Research, in their earnings forecast for Q1.

KIE also expects some headwinds from higher commodity prices.

“On sequential basis, we expect net income to decline 11 per cent in Q1 due to the second wave of Covid-19 and expect the same to decline for most of the sectors, led by raw material headwinds, sharp increase in commodity prices, and sequential decline in volumes,” write Sanjeev Prasad, Sunita Baldawa, and Anindya Bhowmik of KIE in their earnings estimates for Q1.

KIE expects net profits for the BSE 30 index to increase 72 per cent YoY, but decline 3-per cent QoQ and for the Nifty 50 index to increase 127 per cent YoY, but 6 per cent QoQ.

Some brokerages, however, expect an earnings downgrade after three consecutive quarters of upgrade. “Nifty-expected earnings per share (EPS) for FY22 have seen a downgrade of 2 per cent to Rs 733, while 2022-23 EPS remains stable at Rs 868. As the economy reopens and vaccinations gain momentum, demand recovery could strengthen,” write analysts at MOFSL on their earnings preview for the quarter.

According to analysts at PhillipCapital, revenue growth on a YoY basis is expected to be strongest for companies in metals and automobiles, followed by capital goods, infrastructure, logistics, specialty chemicals, cement, retail, and consumer electricals.

Metal and mining companies, such as Tata Steel, JSW Steel, and Hindalco, are expected to report a sharp jump in revenue and profits both YoY and QoQ, thanks to gains from higher metal prices. Banks, on the other hand, are expected to maintain their earnings at the Q4FY21 level, thanks to lower provisions. Brokerages, however, expect a contraction in banks’ net interest revenue due to a combination of low loan growth and lower yields on loans.

Oil and gas companies, such as Reliance Industries, Indian Oil, and Oil and Natural Gas Corporation, are expected to report a sharp jump in revenue and profits YoY, but are likely to take a hit on their earnings on a QoQ basis.