Early birds’ margin shrinks

Although consumer companies have raised prices by a fair bit, they haven’t been able to protect their margins.

Early birds’ margin shrinks
Although consumer companies have raised prices by a fair bit, they haven’t been able to protect their margins.

Most early birds have reported modest numbers for the June quarter earnings season despite a favourable base. Revenues grew reasonably well, helped by elevated commodity prices and price hikes, but high input costs and other expenses have dented profit margins.

Profits at JSW Steel, for instance, plunged 86% y-o-y, even as revenues rose 32% y-o-y for the quarter as the cost of materials consumed jumped 136% y-o-y, and power and fuel costs soared by 120%. At UltraTech, net profits were down 7% y-o-y despite a strong 28% rise in sales, while operating profits fell by more than 8% as energy costs jumped 54%.

Management commentary, while not upbeat, hasn’t been too pessimistic with CEOs fairly confident that margins will see an uptick in the coming quarters as commodity prices soften and demand picks up. The JSW Steel top team, for instance, confirmed demand from the auto and construction segments remains strong and should support consumption. At Havells, which reported very disappointing results, the management believes margins will recover in the second half of the year as commodity prices fall.

For a sample of 183 companies (excluding banks and financials), revenues increased by a shade over 38% y-o-y but with operating profit margins contracting by about 350 basis points y-o-y, operating profits rose by just 16%. The increase in net profits was even smaller at 10.6% y-o-y due to higher depreciation and taxes.

The numbers would look a lot more subdued without Reliance Industries’ revenues of `2.2 trillion, an increase of 53% y-o-y. RIL’s revenues account for roughly 40% of the aggregate revenues of the sample.

Although consumer companies have raised prices by a fair bit, they haven’t been able to protect their margins. Hindustan Unilever (HUL) upped prices by 12% y-o-y but gross margins were down 310 bps while ebitda margins fell 115 bps y-o-y. The company’s premium portfolio did well in helping it arrest the decline in its margins. The management indicated that urban demand appears to be growing faster than rural demand.

While business re-bounded smartly at Avenue Supermarts and the revenue per sq ft jumped 47% y-o-y, helped by a weak base, sequentially, there was a fall. Analysts point out that sales from the general merchandise and the apparel categories remain at lower-than-the pre-Covid levels of 27-28%. The management explained that higher inflation and some continued Covid-19 overhang have led to a weaker demand.

At Havells, ebitda increased by just 2% y-o-y over the weak base of Q1FY22. The reasons for the profit miss were margin pressures – commodity prices volatility and sharply higher A&P spending, and higher employee spends. The falling prices of metals such as copper and aluminum will help margins in the September quarter as well, while channel de-stocking may also be a headwind.

At Hindustan Zinc, too, higher costs partly offset better realisations. Both revenues and profits were up 44% y-o-y. While prices remain elevated during the quarter, they have corrected sharply from their peaks with the outlook for demand weakening. Moreover, the management has guided for a volume growth of just 3-6% in the year which analysts feel is not strong.

Power producers also saw their fuel costs soar but gained from better realisations. At JSW Energy, for instance, fuel costs surged 88% y-o-y, its realisations were up 54% y-o-y. That drove up revenues by 75% y-o-y while the ebitda went up by 46% y-o-y.

IT services players saw their margins contract sequentially thanks to higher compensation costs, expenses to backfill attrition and bigger travel expenses.

While at TCS, ebit margins shrank 190 bps sequentially, at HCL Tech, they contracted by 100 bps q-o-q. Attrition remains a concern at almost every firm – at TCS, it was 19.7%. While demand is expected to slow in key markets like the US where recession-like conditions are expected, analysts believe the June quarter has probably seen the worst of cost escalations. They feel margins should get better, albeit after a couple of quarters, as operating leverage improves with growth, utilisation rises and the costs of sub-contracting work fall.

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