India Inc earnings: Upgrades aplenty but margins a concern

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November 15, 2021 4:17 AM

Britannia’s gross margin was down 500 bps y-o-y, slumping to an eight-year low bruised by rising prices of palm oil, packaging materials and industrial fuels.

However, rising raw material costs caused some damage, up 430 bps y-o-y; operating margins for the sample contracted 57 bps.However, rising raw material costs caused some damage, up 430 bps y-o-y; operating margins for the sample contracted 57 bps.

It’s been a splendid earnings season with surprises outnumbering disappointments and prompting analysts to upgrade earnings estimates for a fair number of companies. On a rough reckoning, brokerages have upped FY22 profit estimates for at least 50% of the companies they track. That’s not surprising because management commentary on demand has been reasonably optimistic; order books are filling up, hotels and malls are open and travel has resumed. In all this, inflation remains a big concern.

The trends that are comforting analysts include the big hiring plans of IT firms, the strong property sales, the pick-up in volumes at FMCG firms and the robust increase in home loans. Indeed, the rebound in real estate is good news for the economy. The concerns are the shortage of key components plaguing the auto sector, the rising cost of energy, input inflation in general and the high attrition at IT firms. While the revival in consumer demand has been fairly strong, not all companies have been able to pass on the higher costs; that has pressured margins.

Several companies have talked of the need to raise prices to be able to pass on the higher cost of inputs. Britannia’s gross margin was down 500 bps y-o-y, slumping to an eight-year low bruised by rising prices of palm oil, packaging materials and industrial fuels. Managing director Varun Berry said there was no substitute for price hikes in such an environment, adding these were being actioned. However, with the festive season behind us it may be harder to demonstrate pricing power and demand wanes.

Revenues in the September quarter grew well, albeit with the help of a low base; for a sample of 1853 companies (excluding banks and financials), they were up 33 %y-o-y, a good part of it helped by commodity inflation. Revenues at SAIL jumped 59% y-o-y. 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.

At the same time realisations improved for a range of goods. Net standalone revenues at Mahindra & Mahindra were up 15% y-o-y on the back of a good ASP (average selling price). Eicher Motors, too, exhibited pricing power with higher ASPs on the back of price hikes taken during the year and a better product mix; this helped boost the topline, though volumes were weak. Sun Pharma’s sales were up a good 12.5% y-o-y with the local business doing well. Godrej Properties reported strong sales, a jump of 141% y-o-y led by new projects. TVS Motor’s topline rose a smart 22% y-o-y led by a 16% increase in the average sales price. The blended realisations at Concor improved by 10% y-o-y, above estimates. At ACC, the blended realisations were up 5% y-o-y as the company sold more premium products and enjoyed a better regional mix.

However, rising raw material costs caused some damage, up 430 bps y-o-y; operating margins for the sample contracted 57 bps. Consolidated gross margins at Dabur were down 200 bps y-o-y while stand-alone ebitda margins shrank 80 bps y-o-y. Consolidated gross margins at Asian Paints contracted a steep 965 bps y-o-y, thanks to a big 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. Larger players continued to take away market share from unorganized units.

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