High prices of commodities yet to hit India Inc's overall profits

Combined net profit of 42 Nifty50 companies increases 19.2% YoY in Q2

High prices of commodities and energy have led to a sharp decline in corporate margins across sectors but they are yet to affect India Inc’s overall profits.

The combined net profits of 42 Nifty50 companies that have declared their results for Q2FY22 were up 19.2 per cent year-on-year (YoY) and reached a record high of Rs 1.12 trillion, up from the Rs 94,000 crore a year ago and the Rs 95,750 crore in the Q1FY22 quarter.

The double-digit growth rate in earnings came despite a 35 per cent YoY decline in the combined net profits of consumer goods companies in the second quarter.

A sharp rise in the profits of commodity producers and banks and non-banking finance companies more than compensated for this.

In comparison, the combined net sales of these 42 index companies were up 26.5 per cent year-on-year during Q2FY22 while their combined operating profits were up 11.2 per cent. Slow growth in operating profits compared to revenues indicates a decline in operating margins but a reduction in interest cost largely compensated for this. The interest cost for the index companies was down 4 per cent YoY in the second quarter. As a result, the combined profit before tax (PBT) was up 26.2 per cent YoY.

The combined net profits of consumer goods companies such as Maruti Suzuki, Bajaj Auto, Tata Motors, Hindustan Unilever, ITC, Nestlé, Asian Paints, and Britannia declined to Rs 6,831 crore in Q2 from Rs 10,492 crore a year ago.

The combined net sales of these consumer companies were up 13.8 per cent YoY in Q2FY22 — growing at the slowest pace in the last three quarters. Their combined operating profits were, however, down 4.3 per cent YoY and their operating margin was down 300 basis point YoY to 15.3 per cent of revenues in the second quarter. One basis point is one-hundredth of 1 per cent.

Analysts attribute the overall rise in Nifty earnings to gains made by commodity companies and banks and non-lenders in the last few quarters.

The commodity producers and BFSI (banking, financial services and insurance) companies together accounted for 63 per cent of the combined earnings of the 42 Nifty 50 companies in our sample, up from 54 per cent a year ago. The analysts expect their contribution to grow further once Oil & Natural Gas Corporation and Tata Steel declare their second-quarter results this week.

“The inflation impact on corporate margins was significant in Q2FY22 but this has been more than offset by the gains to top commodity and energy companies from higher commodity prices. As a result, the overall corporate earnings continue to edge higher,” said Shailendra Kumar, chief investment officer, Narnolia Securities.

The combined net profits of commodity producers such as Reliance Industries, JSW Steel, Bharat Petroleum Corp and Ultratech Cement were up 48 per cent YoY in Q2FY22 to Rs 31,800 crore from around Rs 21,500 crore a year ago and around Rs 28,000 crore in the first quarter of the current financial year.

The corporate earnings have got a boost also from a sharp decline in interest rates after the pandemic came. The resulting decline in borrowing cost led to a sharp rise in the profitability of banks and non-bank lenders. This has also lifted the earnings of commodity companies, most of which have large debts on their books.The combined net profits of BSFI companies in the index were up 31.7 per cent YoY to a record high of around Rs 38,700 crore in Q2FY22. 

The gains largely came from a decline in interest costs as their combined gross interest income was up by only 7.9 per cent YoY in the second quarter. In comparison, their interest outgo was down 3.2 per cent YoY, leading to a further rise in their net interest margins.