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Inflation to weigh on Q1 profit margins; cooling commodity prices to reflect in Q2 numbers

Revenues for auto firms are expected to dip slightly quarter-on-quarter primarily due to a shortage of chips which impacted PV production volumes and also a drop in commercial vehicle volumes owing to the seasonality effect.

The benefits from cooling commodity prices would be seen in the September quarter results.
The benefits from cooling commodity prices would be seen in the September quarter results.

With many companies expected to report a sequential fall in profits, the June quarter earnings season is expected to be a dull one. From autos and banks to construction materials and metals, most sectors have been adversely impacted either by raging inflation, or rising interest rates, the depreciating rupee and elevated commodity prices.

While demand held up fairly well and the services sector did see a big bounce in June, supply-side shortages and high raw material cost hurt production and margins, respectively. The sales and profit numbers will, of course, look very good when compared with the weak June, 2021 quarter when business was badly hit by the second wave of Covid-19. The benefits from cooling commodity prices would be seen in the September quarter results.

Net profits for the universe of stocks tracked by KIE are estimated to fall 16% quarter-on-quarter (q-o-q); for the BSE 30 companies, they are estimated to fall 10% and for the Nifty50 by 11% sequentially.

Revenues for auto firms are expected to dip slightly quarter-on-quarter primarily due to a shortage of chips which impacted PV production volumes and also a drop in commercial vehicle volumes owing to the seasonality effect.

The recovery in two-wheeler volumes coupled with an increase in average consumption spends should boost the numbers.
However, high commodity prices would have dented operating profits which are expected to dip sequentially.

The consumer goods pack is highly disparate but most companies are expected to report reasonably good volumes, the high inflation notwithstanding. Value growth would be strong and should be in double digits for most firms, especially year-on-year. However, gross margins would be under pressure, despite price hikes, and would weigh on the profitability of most stables and discretionary businesses.

Meanwhile, the demand for consumer durables, while fairly strong in April and May, thanks to the severe summer, moderated somewhat in June. “The price hikes were minimal and limited to a few products and the premium segment was relatively less impacted than the mass segments,” an analyst observed.

Cement makers would have been hurt by the rise in fuel costs — pet coke and thermal coal — as also higher expenses on freight. Consequently, despite better realisations, the Ebitda (earnings before interest, tax, depreciation and amortisation) per tonne is expected to have fallen by 10-12% quarter-on-quarter.

The margins of software firms are expected to have contracted sequentially — by anywhere between 100-400 bps — thanks to rising retention costs, driven up by increasing attrition and also higher travel expenses. At TCS, for instance, the Q1FY23 Ebit margin slipped to a multi-year low, declining 190 basis points sequentially to 23.1%. The impact of the wage hike alone was 150 bps.

While net interest income should have seen a good rise with loan growth increasing, the steep treasury losses would drive down banks’ profits. Bottom-lines would get a boost from falling loan loss provisions. Upstream oil and gas businesses will report good profit growth — average Brent prices crossed the $110/barrel mark, up $9/barrel over March end. However, OMCs will likely report poor numbers and may even post losses due to under-recoveries in auto fuel and LPG.

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