After tepid Q1, firms eye demand revival; costs begin to rise after having been reined in for long

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August 23, 2021 4:15 AM

The spike in the prices of inputs, which was reflected in the fall in gross margins, could continue to pressure profitability until demand picks up enough for companies to be able to pass on the increase in costs.

As of now, the cement and chemicals sectors are among the few that are reporting better margins. Over the past year most companies have cut costs but some of this is starting to reverse; spends on promotions and advertising are likely to be much higher this festive season.

Though earnings growth in the June quarter came in a shade below expectations, they were stronger than anticipated. That said, consensus earnings for the Nifty for FY22 have been downgraded by a little under 3%, with metals producers and larger banks seeing upgrades and automakers and insurers seeing downgrades. IT players are expected to keep up their good performance.

The spike in the prices of inputs, which was reflected in the fall in gross margins, could continue to pressure profitability until demand picks up enough for companies to be able to pass on the increase in costs.

As of now, the cement and chemicals sectors are among the few that are reporting better margins. Over the past year most companies have cut costs but some of this is starting to reverse; spends on promotions and advertising are likely to be much higher this festive season.

Nonetheless, the management commentary is fairly positive and CEOs expect business and consumer activity to pick up pace as the vaccination drive progresses and the festive season sets in.

Agencies that track hiring say companies are adding to their workforces, though most of the recruitment taking place — across sectors — is for IT professionals. As business gathers pace in the months ahead, wage costs for companies are expected to go up.

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