Q2 earnings: Inflationary pressure is far from over for India Inc

September quarter results are drawing to a close with only a handful of companies left to reveal their report cards.
 
The combined net profits of 42 Nifty50 companies, that have declared their results so far, went up by 19.2 per cent year-on-year and reached a record high of Rs 1.12 trillion in Q2FY22.
 
In comparison, the combined net sales of these companies were up 26.5 per cent year-on-year while their combined operating profits were up 11.2 per cent.
 
However, slow growth in operating profits compared to revenues indicates a decline in operating margins. And this has worried analysts.
 
On his assessment of Q2 earnings, Joseph Thomas, Head of Research at Emkay Wealth Management Services, said:
 

• Q2 results look satisfactory
• Sales growth improved but Ebitda margins shrank
• Need to watch out if sales growth will accelerate further

 
As pointed out by Thomas, this earnings season was a hit on Ebitda margin which was likely because of India Inc’s inability to pass on increased input costs.
 
Going-forward, experts expect margin contraction to continue over the next few quarters as commodity inflation results in wage inflation. Thomas said:
 

• Wage inflation likely to have prolonged impact on corporate earnings
• Labour shortage and increased capex may accelerate wage inflation
• Pricing power of corporates will improve with economic recovery

 
Amit Gupta, who is fund manager-PMS at ICICI Securities, too, believes consumer-related companies will continue to face headwinds as commodity-related inflation will remain sticky in the near-future. He says:
 

• Commodity-user companies will face challenge going-forward
• Commodity prices may consolidate at higher levels
• Companies need to focus on cost optimisation

 
That said, all is not that bad for India Inc. Despite margin hit, the Street has lauded companies that have managed to increase their market share. Gupta adds:
 

• Asian Paints, Havells have posted market share gains despite margin hit
• Market is eyeing formalisation of the economy

 
Against this backdrop, what is the earnings’ outlook for the second half of the current fiscal year? Thomas says:
 

• H2FY22 earnings expectations remain robust and constructive
• Capex is rising; banking sector is stabilising
• B2B, B2C sectors are expected to do well

 
For Amit Gupta, value-linked sectors like banks and capital goods are likely to do well and he expects overall earnings to grow at a CAGR of 25 per cent till FY24.
 
On Friday, companies like Burger King, Deepak Fertilisers, Grasim Industries, Hindalco Industries and ONGC will declare their September quarter results.
 
That apart, investors will also track industrial production data for September and retail inflation data for October, due to be released later today.
 
Moreover, shares of Fino Payments Bank will also debut on the bourses today.
 
Globally, inflationary concerns, bond yield movement and oil price trajectory will guide the sentiment.

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