in cyclical sectors are likely to drive corporate earnings in the June 2021 quarter, too. The combined net profit of 230 early bird companies
in Q1FY22 is up 70.6 per cent year-on-year (YoY), because of a favourable base and strong showing by firms in cyclical sectors, such as banking, metals & mining, cement, and oil & gas.
The combined net sales were up 35.2 per cent YoY to Rs 5.25 trillion in the June 2021 quarter, though the figure was down 5 per cent over Q4FY21. These companies’ net sales were down 21.7 per cent and their net profit had shrunk 19.8 per cent a year ago.
across sectors, but for IT exporters, reported a sequential decline in net sales. Most companies also reported a sequential and YoY decline in their operating margin -- except for banks, metals and cement companies – because of higher commodity and energy prices.
The early bird's combined net profit at Rs 73,000 crore in Q1FY22 was up 2.2 per cent QoQ but earnings were 3.3 per cent lower than the record high clocked in Q3FY21.
For example, cyclical sector companies reported their highest-ever combined quarterly profit of Rs 40,681 crore in the June quarter, up nearly 40 per cent from Rs 29,108 crore a year ago. The earnings of cyclicals were up 6.6 per cent over the March quarter and 54 per cent higher YoY.
Net sales of cyclicals were up 28.6 per cent YoY to Rs 3.17 trillion but down 6.5 per cent from the record high of Rs 3.39 trillion in the Mar 2021 quarter.
Among non-cyclicals, earnings growth was led by software exporters, such as Infosys and Wipro; consumer goods companies like Hindustan Unilever, ITC, Bajaj Auto, Asian Paints, and Havells India reported a sequential decline in revenues and profits.
Non-cyclical companies’ combined net profit in Q1FY22 was up 136.3 per cent YoY to Rs 32,353 crore -- the lowest since the September 2020 quarter. These companies’ combined net sales were up 30.2 per cent YoY to Rs 2.08 trillion. For comparison, their net sales and net profit were down 12.4 per cent and 49.3 per cent YoY, respectively, in the June 2020 quarter.
These firms clearly showed the impact of rising inflation and high commodity and energy prices. For example, Hindustan Unilever's operating margin in Q1FY22 was the thinnest in nine quarters, while that of Bajaj Auto was the lowest in nearly five years, except for the June 2020 quarter when the company didn’t sell many vehicles due to the lockdown.
In contrast, metal firms, such as JSW Steel, reported their best-ever margins in the first quarter; it was the same for cement makers like UltraTech Cement, ACC, and Ambuja Cements.
These companies in the cyclical sector gained from both higher prices for their products and a sharp decline in interest cost.
While the higher realisations benefitted metal firms and cement producers, lenders, including banks, gained greatly from a YoY decline in their interest cost. JSW Steel, for example, reported its best quarterly net sales and operating and net profit in Q1FY22. In the cement sector, UltraTech and Ambuja Cements reported their operating margins in nearly a decade thanks to higher realisations.
Reliance Industries, too, gained from the jump in energy and petchem prices but took some knock from a sequential decline in the revenue and earnings at its retail division.
Lenders, on the other hand, continued to gain from lower interest rates. The combined interest cost of banks, insurance, and non-banking financial companies in the Business Standard sample was down 10.6 per cent YoY in Q1FY21, allowing them to report higher earnings despite on the worst showing in interest income. The companies' combined interest income was up just 1.9 per cent YoY in Q1FY21 due to a combination of poor credit growth and decline in yields on loans, in line with a falling interest rate.
The non-cyclical sample was dominated by software exporters, such as Tata Consultancy Services, Infosys, Wipro, and HCL Tech. The combined net sales and net profit of IT companies grew in double digits in the June quarter on a YoY basis and this was their best showing in the past 10 quarters.
But analysts expect some moderation in IT sector
earnings growth over the next few quarters because operating costs, including salary & wages, are once again growing faster than revenue, putting pressure on the margin. The operating margin for IT companies was down on a sequential basis but was still up on a YoY basis.
This, the analysts say, can set the stage for an earnings downgrade during the second half of FY22. “The numbers suggest that lenders may find in tough to report higher earnings in FY22, while manufacturers and consumer companies can take a big hit on their margins if commodity prices stay high even in the second half of FY22,” says Dhananjay Sinha, MD and chief strategist JM Financial Institutional Equity.
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