Volatile commodities, spending hit Q3 profits
2 min read . Updated: 22 Feb 2023, 10:56 PM IST
Premium- A slump in staples and discretionary consumption dragged down India Inc’s earnings
- Companies in the banking, financial and auto sectors performed well in the Dec quarter
NEW DELHI : The December quarter earnings of India Inc. were impacted by a sluggish commodities sector and a slowdown in both discretionary and staple consumption, leading to a 15% decline in profits among 2,930 companies, excluding banking and finance, according to earnings data analyzed by Mint.
“Corporate earnings were below expectations during the quarter, dragged by commodities, while financials and auto held the fort," said analysts at Motilal Oswal Finacial Services. A broad-based slowdown in consumption, both staples and discretionary, also hit corporate earnings, they added.
Companies in the banking, financial and auto sectors performed well, as did IT, which also exceeded analysts’ expectations.
However, underperformance in the commodities market—particularly in metals and oil and gas—was a disappointment, according to V.K. Vijayakumar, chief investment strategist at Geojit Financial Services. Financial and IT sectors performed well in the fiscal third quarter, as expected, and the ongoing credit cycle suggests that financials have the potential to continue their momentum for a few more quarters," added Vijayakumar.
Auto, particularly premium, surprised positively. The sector is coming out of a five-year downcycle, and earnings of Tata Motors, Bajaj Auto, Maruti and M&M were encouraging, he added. The same has led to some upgrades. Also, a few other sectors are seeing a margin revival, with declining pressure on input costs and thereby an improved outlook, leading to upgrades.
Analysts at Jefferies India Pvt. Ltd have raised the FY23 earnings estimates for 47% of the 147 companies it tracks, while downgrades were made to 46% of companies. The analysts raised and cut earnings by 10% each for FY23, with larger cuts seen in commodities (cement, metals). For cement companies, the soft pace of price hikes remained a key concern even as cost pressure eased, while for metal companies, global concerns weighed.
For consumer durables, the weak festive season sales and demand concerns led to downgrades, while for staples, it was muted volumes partly on weak rural demand. For consumer discretionary, revenue growth was mixed with same-store sales somewhat under pressure as higher prices impacted consumption, analysts said.
The upgrade to downgrade ratio stands at an even 1:1, and that is again something for the markets to gain confidence from, said Manish Jain, a fund manager at Ambit Asset Management.
Sectors that have seen significant upgrades are auto and financials, while those that have seen downgrades are metals, pharma and chemicals, and industrials, said Nishit Master, portfolio manager, Axis Securities PMS.
Meanwhile, a silver lining is visible in the sequential improvement in margins, which meant that the overall profit for the 2,930 companies improved by 12.84% sequentially.
Even though raw material costs and total expenses rose from a year ago, leading to a 1.4% decline in earnings before interest, tax, depreciation and amortization (Ebidta), the sequential decline in costs meant operating profit rebounded sequentially, increasing 10% over the September quarter. Net profit rose 12.84% from the September quarter.
“Reported Ebitda for Nifty50 has been slightly better than expected, with significant sequential improvement seen in cement, auto and power, while sequential margin contraction is seen in pharma," said Master of Axis Securities.
