India Inc earnings losing momentum as demand recovery falters, shows Q1

Sequentially, combined net profit down 12.4%, net sales by 7.8%

The strong surge in India Inc’s profits seen after the first wave of Covid-19 is now losing momentum as demand recovery falters.

The combined net profit of India’s top listed companies was down 12.4 per cent in Q1FY22 on a quarter-on-quarter (Q-o-Q) basis while net sales declined 7.8 per cent Q-o-Q.

The 2,866 companies in the Business Standard sample reported combined net profits of Rs 1.90 trillion in Q1FY22, up four times from Rs 48,890 crore in Q1FY21 and against Rs 2.16 trillion in the January-March FY21 quarter.

In comparison, these companies had combined net sales of Rs 21.4 trillion in Q1FY22, up 42 per cent from Rs 15.1 trillion a year ago, but down 3.3 per cent from Rs 23.3 trillion in the January-March FY21 quarter.

Importantly, the surge in profits and revenue after the first wave of Covid-19 was led by domestic and global cyclical sectors and the earnings in most of these sectors seem to have peaked. Metal and energy prices are off their highs while banks’ earnings may come under pressure from a rise in interest rates.

The combined net profit of the companies excluding banks and financials, oil and gas, and metals and cement in Q1FY22 was the lowest in four quarters and up only 12.2 per cent over Q1FY20 quarter. This translated into 4 per cent compound annual growth (CAGR) in earnings in the last three years -- not very different from earnings growth in the pre-pandemic period.

The moderation in revenue growth has been more dramatic. The combined net sales of all listed companies in Q1FY22 at Rs 21.4 trillion are only 3.3 per cent higher than in the April-June FY20 quarter. In comparison, the combined net sales of all listed companies ex-BFSI, oil and metals in Q1FY22 are up just 0.5 per cent over the April-June FY20 level (see the adjoining charts).

“Nearly 90 per cent of the post-pandemic surge in corporate profits in the last few quarters came from price effect rather than volume effect. This includes metals and banks which have seen the biggest jump in earnings in the last four quarters,” said Dhananjay Sinha, managing director and chief strategist, JM Financial Institutional Equity.

According to him, the demand recovery after the first wave of Covid-19 in India has been faltering after the pent-up demand was over by the end of December last year. This, in turn, has affected revenue and earnings growth for companies in consumer demand-related sectors such as FMCG, automobiles, auto ancillaries, consumer durables and retail lenders.

This shows in the sectoral break-up of corporate profits in the first quarter. Metals and mining and banks were the two most profitable sectors in Q1FY22. The two together accounted for 38 per cent of all corporate profits in the quarter, up from 30 per cent in Q4FY21 and much higher than their five-year average contribution of 15 per cent.

Metals and mining companies such as Tata Steel, JSW Steel, Coal India, Hindalco, Hindustan Zinc and NMDC, put together, were the single-biggest contributor to corporate profits in the April-June FY22 quarter. With a combined net profit of Rs 39,000 crore, these companies accounted for a fifth of India Inc’s earnings in Q1FY22, up from 18 per cent in Q4FY20 and their five-year average contribution of 7.3 per cent.

Nearly two-thirds of the corporate profits in Q1FY22 were accounted for by companies in four sectors -- metals and mining, banks, oil and gas, and IT services. Historically, these four sectors have accounted for 55 per cent of corporate earnings.

In contrast, pure-play manufacturers in sectors such as automobiles, consumer durables, capital goods, and FMCG saw a Q-o-Q decline in operating profit margins, revenues, and profits in Q1 FY22.

The combined net profit of 1,305 manufacturing and domestic-market-oriented service sector companies was down 21 per cent Q-o-Q to the lowest level in eight quarters with the exception of the lockdown quarters of Q4FY20 and Q1FY21. In comparison, their net sales were down 15.6 per cent Q-o-Q.

These companies reported combined net profits of Rs 45,640 crore in Q1FY22, down from Rs 57,654 crore in Q4FY21. Net sales in the period declined from Rs 8.35 trillion to Rs 7.05 trillion. The analysis excludes banks, insurance, NBFCs, IT companies, oil and gas, and commodity producers such as metals, mining, cement, sugar, and paper.

Given this, many analysts see a further downgrade in corporate earnings in the second half of FY22. This could test the current rally on the bourses.