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NEW DELHI : The January-March quarter could be a challenging one for India Inc, with the Russia-Ukraine crisis remaining unresolved. Rising oil and gas, and other commodity prices could provide strong headwinds on margins for manufacturers in most sectors, despite an improvement in demand during the quarter, aided by the opening up of the economy in the wake of disruptions caused by the Omicron variant of coronavirus.

Among sectors, financials, technology and oil and gas are expected to do well. However, the remaining sectors may see earnings impacted by cost headwinds.

Kotak Institutional Equities expect Q4FY22 net income of its coverage universe to grow 27% year-on-year (y-o-y), and 16% sequentially, predominantly driven by strong earnings growth in banks, oil and gas and consumable fuels. However, excluding these sectors, it expects net income of its coverage universe to grow at a much slower rate of 9% y-o-y.

Motilal Oswal Financial Services Ltd’s (MOFSL’s) results preview echo these views. MOFSL expects oil and gas, financials, and technology to contribute 88% of incremental earnings in Q4FY22. Excluding financials, it expects Q4FY22 earnings for companies in its coverage universe to record a modest 10% y-o-y growth.

Banks are likely to do well, helped by strong improvement in net interest income (NII), while healthy asset quality, low provisions, and better performance of large banks will lift overall performance. In financials, NII growth is likely to be the strongest in the last eight quarters as credit offtake picked up during the festive season, said analysts at Yes Securities Ltd.

Higher crude oil prices are likely to boost realization of upstream oil and gas companies as improved marketing, refining margins, and inventory gains will benefit downstream companies.

Banks and financial institutions are likely to polarize performance on an overall basis, said Aishvarya Dadheech, fund manager, Ambit Asset Management. He also expects auto, consumer staples, pharmaceuticals, chemicals, and building material to remain laggards. These sectors will be adversely impacted by raw material inflation, he said. Consumer staples and auto will have a double whammy of slower growth (rural) and rising commodities prices, Dadheech said. Even metal and mining will see deterioration in operational performance, he said.

Kotak Institutional Equities expects negative-to-single-digit y-o-y net profit growth for automobile, construction materials, consumer staples, pharmaceuticals, and metals and mining sectors. Though metal companies may benefit from rising steel and base metals prices, producers of steel and aluminium dependent on external supplies of key inputs will see an impact on costs and margins, limiting earnings growth.

Automobile manufacturers on the other hand are likely to be impacted because of the production pressure caused by chip shortages, higher raw material costs, and the rising cost of ownership. A weak demand environment and higher fuel, power, and logistic costs may impact the construction sector. Pharma companies may feel the pinch of cost inflation in key ingredients and higher selling and general administrative costs.

The impact of rising commodity prices on earnings for the broader market and economy are likely to be higher than that of Nifty companies, as the representation of these sectors in the index is marginal, said MOFSL. BFSI, IT, utilities, and telecom have largely remained unaffected by input cost pressure. Strong demand visibility in IT, pick-up in credit growth, and normalization of asset quality should lend support to Nifty earning, added MOFSL.

On the revenue front, sales for companies under MOFSL’s coverage are likely to grow by 32% y-o-y, led by higher commodity and energy prices.

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