How higher input costs will impact India Inc and markets

India Inc’s July-September quarter earnings season has got off to a good start. This is thanks to the large gains posted by companies in the metals and energy sectors. However, this masks the hit consumer companies and general manufacturers have taken on their margins on account of higher input costs.

The combined net profit of the 222 firms that had declared their results for the September quarter of FY22 was up by 24.1 per cent year-on-year to a new high of around Rs 70,400 crore. This was also higher than the Rs 65,550 crore recorded in the April-June quarter. By comparison, the combined earnings of these companies had risen by 90 per cent year-on-year in the June quarter, and by 25.4 per cent year-on-year in the September quarter of FY21.

The combined net sales of these early-bird companies rose by 29.6 per cent year-on-year to Rs 5.45 trillion in the September quarter this year, compared with Rs 4.84 trillion in the previous quarter.

The biggest gainers were companies in the oil & gas and metals & mining sectors, followed by IT services firms like Tata Consultancy Services, Infosys, Wipro and HCL Technologies. In fact, companies in these three sectors accounted for almost the entire growth in the combined earnings of the early-bird sample on a year-on-year basis.

In contrast, general manufacturers and consumer goods makers reported a slowing of volume growth and a decline in margins, while companies in the BFSI (banking, financial services and insurance) space saw a further slowdown in gross interest income and an uptick in operating expenses such as salaries and wages.

Though firms in the BFSI space reported a slowdown in interest income at a gross level, they saw double-digit growth in earnings, thanks to gains from lower interest costs.

Meanwhile, general manufacturers and consumer goods makers were hit by a sharp increase in commodity and energy prices. Many companies in these sectors reported sequential decline in net profits, despite strong revenue growth. It was the same with IT services companies.

Nomura said: “Unless commodities/oil cool off, firms will face a difficult choice of raising prices further and risk demand impact or endure margin pressure. We believe latter is more likely.”

According to G Chokkalingam, founder and CIO, Equinomics Research, metals, minerals, oil, food crops, fertiliser prices have gone up substantially. Not every company will be able to pass on input cost rise to consumers. Markets have not fully factored in inflation worries. No broad-based inflation-centered market correction. Sharp correction only in select pockets.