Home >Economy >Early Q4 earnings show inflation hit on margins

A steep rise in commodity prices have impacted margins of some companies that have reported their March quarter earnings, according to early trends. However, aggressive cost rationalization by corporates, price hikes by a few, and the low base of the last comparable financial year have helped fourth quarter earnings so far.

A Mint analysis of 124 listed companies showed that net sales have jumped to a 10-quarter high of 20.04% year-on-year (y-o-y) in the March quarter. This compares to net sales growth of 8.01% in the December quarter and a negative 4.04% in the March quarter of FY20.

Similarly, adjusted net profit growth of the companies was 40.98% y-o-y in Q4FY21, the highest in 11 quarters. Net profit growth stood at 27.24% in December quarter and negative 11.74% in the quarter ended March 2020. Net profit is adjusted against a one-time profit or loss. The review excludes banking, financial services and insurance, and oil and gas companies, as they follow a different revenue model.

“The key takeaway thus far has been that revenue growth has been in line with or above estimates, as was the case in consumer space and IT. Autos saw an impact of steep commodity inflation. However, earnings impact was mixed as a few made significant price hikes or cost reductions to offset the impact," said Amit Shah, head of India equity research, BNP Paribas.

The three months ended March saw sharp commodity inflation with steel prices rising over 15%, other key metals such as copper up by 13%, and aluminium by 11%. Crude prices were up 23%. The Bloomberg Commodity index, which tracks 23 commodities in six sectors, gained 7% during the quarter.

A rise in commodity prices impacted a few fast-moving consumer goods and auto companies. Bajaj Auto’s commodity input costs rose 4-5%, against which the company has made price hikes of 4% in phases. Its earnings before interest, taxes, depreciation, and amortization (Ebitda) margin contracted 60 basis points (bps) y-o-y and 170 bps sequentially to 17.7% in Q4FY21.

The Bajaj Auto management expects a further 300 bps impact in Q1FY22, for which it took a price hike of 1.5-2% in April. Britannia also recorded a commodity basket inflation at 3% with a steep rise in costs of palm oil and milk during the quarter.

Companies have started hiking prices, but there has been a lag and they may not pass it on fully, said Shah. Thus, margin outlook has deteriorated compared to two-three months ago.

Cement companies have reported better numbers despite a steep rise in input costs mainly on account of the healthy revenue growth and better realization on an annual basis, according to Rusmik Oza, executive vice president and head of fundamental research, Kotak Securities. “There is a certain impact of higher raw material cost visible in FMCG companies. The steep rise in copper and steel prices to a near-decade high is a cause for concern for the manufacturing sector and will eat into margins in the coming quarters," Oza said.

Companies are reporting healthy operating cash flows because of cost rationalization and many have reported very good free cash flows too, Oza said. “In a few IT companies, the disallowance of goodwill as a depreciable asset has increased the tax liability and impacted earnings. Otherwise, the IT space could have done far better in terms of earnings growth in Q4."

While earnings momentum is likely to continue in the March quarter, FY22 earnings trend is not showing signs of a revival with the second wave of covid and localized curbs likely to hurt demand in certain discretionary categories and new launches likely to get postponed. Management commentaries of consumer companies indicate local lockdowns may dampen Q1 sales, but a faster recovery is expected on vaccinations and strong rural drivers.

“Company managements, especially in the consumer and automobile space, have acknowledged that the second wave will again disrupt demand. However, they are not able to quantify the potential impact on account of the worsening covid situation. IT companies seemed very confident of achieving mid-teen growth for FY22 and intend to increase hiring," Shah said.

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