India Inc Q3 Earnings: Slowest Q3 Earnings in 6 Quarters

Despite the effects of the Omicron variant and high base effect, India Inc., the country’s formal sector, has delivered a healthy quarterly performance for Q3 FY 22. The combined profits of 3191 companies listed on India’s stock exchanges have increased 26.9% YoY (year-on-year) from the same quarter in FY 21.

However, earnings growth in Q3 FY 2022 is one of the lowest since the last six quarters. This is especially true for non-financial companies bearing the brunt of inflation. A significant rise in the price of raw materials has hurt many businesses.

Now, let us examine what this means for India Inc. in the next quarter.

Quarterly Performance of India Inc. as of December 2021

According to a study by popular finance news Business Standard, India Inc. has shown healthy profits for Q3 FY 2021-22. The 3,191 listed companies studied showed a combined net profit of Rs. 2.39 trillions, up 26.9% from last fiscal’s Rs. 1.88 trillions. Their net sales were higher than the previous quarter (Q2 FY 22), with a rise of 24% YoY.

India Inc. has seen a strong financial performance for the previous 4-5 quarters, but in December 2021, its balance sheets have mixed results. As cost of raw materials and inflation surged, consumer-facing industries and manufacturers struggled with lower margins and sub-par revenue growth.

According to the global brokerage firm Jefferies, IT companies have continued reporting strong revenues and positive margin trends. Private banks, too, have reported improvement in asset quality and sequential growth. Other sectors that have seen strong growth include cyclicals ones like insurance, real estate, metals, mining and oil and gas producers.

However, non-cyclical companies have seen poor or flat growth. The combined net profits of non-cyclical companies in Q3 FY 22 saw their slowest growth in the previous six quarters at 1.8% YoY. The cost of raw materials has surged, with inventory costs up by 500 basis points to share of sales for 1,754 listed companies (excluding BFSI).

As a result, many companies have deleveraged their balance sheets, resulting in a flat interest bill for December 2021.

Sectors That Have Seen Slow/Negative Growth in Q3 FY 22

High inflation and surge in raw material cost have kept demand subdued for consumer industries. At Hindustan Unilever, volumes went up only 2% YoY while they were flat at Godrej Consumer and Marico. Consumer staple companies have witnessed meagre volume growth due to a lack of demand in their rural business.

At Tata Steel, standalone sales volume declined 5% YoY due to a weak global market and little domestic demand. Similarly, SAIL delivered operation profits much below expectations owing to higher operating costs and weak volumes.

Sectors such as two-wheelers have also seen muted demand as ownership costs have surged. At Bajaj Auto, volumes of motorcycle sales have fallen by 20% due to a decrease in demand and a global chip shortage. At Maruti Suzuki, sales volumes are down 13.2%.

Companies with strong brands have made up for weak volumes with better realisation. For example, the average selling price at Maruti Suzuki went up 15% YoY, while Page Industries made an 8% price hike.

Pharmaceutical companies have seen double-digit erosion in US generic pricing. Other sectors that saw big erosion in margins include steel, cement and consumer staples. BHEL has seen a 100 bps decrease in gross margins as commodity prices for 50% of its order backlog have increased.

Meanwhile, JWS Steel has seen its EBITDA margins fall by 500 bps while Marico’s gross margins have fallen by 320 bps YoY. Consolidated gross margins for Godrej Consumer stood at 50.7%, down 440 bps on a YoY basis.

India Inc.’s Record Profits During the Previous Quarter

In sharp contrast to the December 2021 quarter, India Inc. had posted its highest-ever quarterly performance in Q2 FY 222. The top listed companies reported a 46.4% increase in net profits to Rs. 2.39 trillions for Q2 FY 22. These earnings were driven by improved demand, low corporate tax and better cost efficiencies.

A surge in the profitability of banks, insurance companies, NBFCs, metal & mining and oil & gas firms have led to a rise in profits. The combined net profits of these sectors were at Rs. 1.53 trillions, up 87% YoY from Rs. 82,000 crores last fiscal.

The combined profits after tax of 4,175 listed companies stood at Rs. 2.47 trillions while the top-line was at Rs. 22.54 trillions. India Inc. crossed the Rs. 20 trillions mark in the March 2021 quarter, 40 quarters after crossing the Rs. 10 trillions mark in 2010. This record profit was mostly due to the downturn in the pandemic-truncated year of 2020.

Expectations for the Future

With mixed results in Q2 FY 22, most analysts do not have very high expectations for India Inc.’s earnings. For the next quarter, many expect downgrades to outnumber earnings upgrades, with at least 55% – 60% of all companies slated to see downward revisions.

However, the effects on Indian companies will ultimately be decided by commodity prices and how they handle price hikes. The downsides may be capped soon if RBI’s projection of 4.5% inflation in FY 2022-23 becomes true. The global market sentiments and Russia-Ukraine’s stand-off will also decide India’s market performance.

Frequently Asked Questions

1. Is India Inc. the name of a company?

No, India Inc. is not a public or private company. It is the name given by the country’s media to its formal sector comprising both government and private companies.

2. Why do some experts expect negative growth in the near future?

The cost of raw materials has increased by a wide margin, while inflation has also increased. As a result, businesses may find it difficult to pull off good profit margins. Meanwhile, consumers may resist the high prices of items and curb their spending.

3. What factors led to India Inc.’s record financial performance in Q2 FY 22?

A combination of factors led to India Inc.’s excellent profit margins in Q2 FY 22. This includes the previous fiscal’s low profits, reduced tax rates, improved cost structures and an absence of huge Capex cycles.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.