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The June-quarter earnings season, which is nearly over, was a disappointment in several ways. The headline figure is impressive: sales of Indian companies were up 36% year-on-year (y-o-y), against 21% in the March quarter, shows a Mint analysis. But this was in large part due to a low base, apart from better realizations.

The sequential growth momentum, a more useful metric due to the base effect, moderated to 2.1% from 9.4% due to weakening global demand, showed the analysis of 1,844 listed companies for which data is available. An escalation in input costs took a toll on profits, which contracted nearly 20% quarter-on-quarter (q-o-q) after a 13.5% growth in the March quarter.

Global headwinds are likely to slow down the momentum even further and impact earnings in the medium term, even though some relief is possible from the recent fall in input prices and strong pent-up demand that could drive growth in the ongoing quarter, market observers said.

Looking through a pre-pandemic prism, inequalities cropped up with larger and mid-sized companies recovering well with over 7% annualized profit growth since 2019, but smaller entities (with revenue less than 500 crore) failing to keep their head above water as covid-led disruptions came down heavily on them.

The revenue of small-cap firms highly depends on the strength of the economy and industry, said Vinod Nair, head of research at Geojit Financial Services. “They usually move in a lag effect and in association with the growth of large clients like mid and large caps companies," he added.

Lopsided growth

A sectoral analysis points to patchy recovery. Export-oriented sectors such as information technology and pharmaceuticals are reeling under the heat of a challenging macro environment globally, while some others are riding on recovering domestic consumption. Sectors that are mostly dependent on the domestic economy were least hurt, thanks to robust local demand, Nair said.

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Major sectors such as auto and banking, financial services and insurance (BFSI) saw a sequential contraction of 2.6% and 9.1% in revenues, respectively. Srikanth Subramanian, CEO-designate of Kotak Cherry, is bullish on a good turnaround for the BFSI sector. “Private lenders are relatively better positioned, with lower slippages and provisions, though credit offtake saw moderate recovery," he said. Auto sector is going through a lot of structural changes as more companies adopt the electric vehicles route, Subramanian added.

Some of the worst performing segments were infrastructure and engineering and capital goods saw a massive topline decline of 37.2% and 21.8% q-o-q, respectively, the analysis showed.

Cost pressures

Elevated inflationary pressures were felt across the board. This surge in input costs even undermined the gains from the buoyant domestic consumption during the quarter. Total expenses made up as much as 76.8% of revenue for the sample, the highest in nine quarters. This was up 210 basis points (bps) sequentially, and 520 bps in a year. Raw material expenses as a percent of revenues (33.8%) saw an even steeper rise of 310 bps sequentially, but wage costs appear to have stabilized, rising only marginally to 8% from 7.8% in the March quarter.

The recent moderation in commodity prices and easing supply chain pressures could provide a fillip to earnings in the subsequent quarters. Nair sees a high possibility of raw material prices to have peaked and expects sectors such as consumer goods, pharma, chemicals, oil and gas, power and manufacturing to mostly benefit.

Earnings outlook

Commodity prices have cooled off since July due to the evolving risk of a slowdown in major global economies, and this could have a positive impact on corporate margins, Subramanian noted. The aggregate operating and net profit margins of companies have declined a little over 2 percentage points since the March quarter. There is also a ray of hope with the onset of the festival season which is likely to spur consumer demand, especially in the rural sector, and boost margins.

For the ongoing and subsequent quarters, there are lower chances of any potential earnings downgrades due to strong demand and fall in raw material costs, Subramanian said. Yet, the global environment overhang prevails over optimism. “Macro headwinds could lead to global slowdown which could have an impact on export-driven sectors," he said. Moreover, with the forthcoming winter, global crude and gas prices could head northward and could dent margins of companies.

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