Q1FY22 earnings: Input costs, low sales crimp India Inc’s profits

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August 02, 2021 4:00 AM

The aggregate results were boosted by strong numbers from producers of metals. Vedanta’s consolidated ebitda increased 9% q-o-q led by sharp sequential volume growth, a recovery in prices.

Net sales have fallen sequentially both for consumer and industrial businesses, not surprising given the local lockdowns across the country during the quarter.Net sales have fallen sequentially both for consumer and industrial businesses, not surprising given the local lockdowns across the country during the quarter.

Analysts seem to have got ahead of themselves going by the string of disappointments in the June quarter earning season. From Biocon, Maruti Suzuki, Nestle, Dr.Reddy’s Labs and TVS Motors to a host of smaller companies like Crompton Greaves and Rallis, results for Q1FY22 have barely met the Street’s expectations. However, producers of metals like JSW Steel have seen their profits soar while IT players have done reasonably well. Larsen & Toubro reported a good set of numbers with the engineering behemoth seeing an uptick in ordering prospects. The company, analysts say, is well-positioned to make up for a weak start as the ordering prospects pipeline at the end of June.

The Q1FY22 numbers must be read in the context of the very weak base from a year-on-year perspective and a slightly strong base effect on a quarter-on-quarter basis. Net sales have fallen sequentially both for consumer and industrial businesses, not surprising given the local lockdowns across the country during the quarter.

At TVS Motors revenues declined 26% q-o-q while at Crompton Greaves, they were down 28% q-o-q as lockdowns impacted revenues. Maruti Suzuki volumes fell by 28% q-o-q. UltraTech reported a 23% q-o-q drop in volumes while at JSW Steel, they were down 11% q-o-q. Some companies have been able to offset the smaller volumes by raising prices but for most revenues have also fallen. Retail businesses, too, were impacted; at Avenue Supermarts, revenues were down 31% q-o-q and volume growth at Hindustan Unilever hasn’t matched expectations. At Tata Motors, passenger vehicle volumes declined 23% q-o-q while commercial vehicle volumes crashed 53% q-o-q.

Gross margins for a host of companies were under pressure as raw material costs remained high. At HUL, for instance, gross margins fell 140 bps y-o-y to 50.4% driving down ebitda margins by 115 bps y-o-y. At Asian Paints, the y-o-y inflation in the raw materials basket resulted in a sharp decline in the consolidated gross margin of 630 bps y-o-y and 475 bps q-o-q. That drove down the ebitda margin to 16.4% way below estimates. At CEAT, consolidated ebitda while going up 63% y-o-y fell sharply by 36% sequentially due to lower-than-expected gross margins. At Bajaj Auto, raw material costs increased 370 bps quarter-on-quarter of which the company as able to offset 170 bps through price hikes and 100 bps due to rupee depreciation benefits.

What stands out is that even after the considerable cost cutting in FY21 companies continue to eke out savings by trimming expenses. At Vedanta, for instance, costs were muted across divisions. A study of a sample of 490 companies (excluding banks and financials) showed operating profit margins expanded by a decent 144 basis points q-o-q because expenditure fell by about 12% whereas revenues were down a smaller 10% q-o-q.

The aggregate results were boosted by strong numbers from producers of metals. Vedanta’s consolidated ebitda increased 9% q-o-q led by sharp sequential volume growth, a recovery in prices.

The concern, this time around, is that rural demand might not be as resilient as in the last couple of years given many rural areas were badly hit during the second wave. Moreover, the kharif crop could be affected given the monsoon has been uneven so far. Lenders like Mahindra & Mahindra Financial Services which have a fair bit of exposure to rural India are reporting very poor numbers. The unemployment in rural India remains relatively high at 6.75%. While the stable disposable incomes from those employed in sectors such as IT, e-commerce, BFSI and government will hold up consumptions, it’s a fact that retail sales of both cars and two-wheelers aren’t growing relative to FY20.

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