Q2 earnings: Sales rise, input costs hurt India Inc profit margins

At UltraTech, for instance, the management is confident of strong demand recovery of about 6-8% y-o-y in H2FY22, post the monsoons.

The ratio of raw materials to sales was up 355 basis points, in the three months to September.

With demand coming back across markets, rural and urban, the September quarter saw corporate sales regain momentum. Larger players continued to take away market share from unorganised units. However, inflation in inputs weighed on profits keeping margins in check; some firms took price hikes and cut back on non-essential expenses to protect their margins. Management commentary is reassuring with most expecting demand to look up further in the months ahead. At UltraTech, for instance, the management is confident of strong demand recovery of about 6-8% y-o-y in H2FY22, post the monsoons.

The quarter reflected a resurgence in demand across businesses, albeit on the subdued base of Q2FY21. Revenues at Jubilant Foodworks were up 39% y-o-y while at TVS Motor, they rose a smart 22% y-o-y led by a 16% increase in the average sales price. Asian Paints reported a stand-alone revenue growth in decoratives of a smart 36% y-o-y, on the back of a 34% jump in volumes while JSW Steel posted an increase in consolidated sales of 71% y-o-y, as steel prices stayed elevated. At Indian Hotels, the domestic business had recovered to 86% of pre-Covid revenues while the international portfolio was at 62% of pre-pandemic levels. The consolidated revenue grew 184% y-o-y. At retailer Avenue Supermarts, the stand-alone revenues were up nearly 50% y-o-y driven up by better footfalls post the second wave. Standalone revenue at Shoppers Stop more than doubled y-o-y, above estimates helped by the low base of last year’s lockdown. This helped the retailer report a positive Ebitda and narrow the net loss.

Sales, which were up a good 35% y-o-y, for a sample of 202 companies (excluding banks and financials), were driven by good realisations and price increases. It must be mentioned, though, that the sample is skewed by Reliance Industries whose sales were up 50% y-o-y.

Gateway Distriparks, for instance recently took a Rs 1,000/FEU hike in its transportation rates to pass on recent cost increases; the company plans to pass on the impact of normalisation of haulage rates as well. The blended realisations at Concor improved by 10% y-o-y, above estimates. At ACC, the blended realizations were up 5% y-o-y as the company sold more premium products and enjoyed a better regional mix.

However, not all companies were able to pass on the rising input costs. At Havells, the price hikes did not match the sharp rise in prices of raw materials resulting in lower gross margins. However, the management expects margins to recover to pre-Covid levels in the next few quarters. At Hindustan Unilever, gross margins contracted 140 bps y-o-y while ebitda margins fell 45 bps y-o-y.

At JSW Steel, higher costs more than offset the better realizations and analysts point out high prices of coal could keep margins under pressure, unless these are passed on. The consolidated gross margins at Asian Paints fell by a steep 965 bps y-o-y, thanks to a steep increase in the cost of raw materials. Gross margins at Nestle were down 240 bps y-o-y due to costlier raw material prices of edible oils and packaging materials.

The ratio of raw materials to sales was up 355 basis points, in the three months to September.

Consequently, the operating profit margin (opm) contracted by about 45 bps. The IT sector turned in a very good show with almost every player beating expectations. Infosys posted excellent all-round growth reporting stable margins and an improvement in client metrics. Margins at TCS were steady and analysts believe the company is well-positioned to tackle any headwinds. Reliance Industries reported a good set of numbers with most segments performing well.

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