Q1 early-bird results show inflation effect on India Inc's profits

First sequential contraction in corporate earnings after 4 quarters of expansion

The early-bird results for the April-June 2022 quarter (Q1FY23) hinted at a decline in earnings, even as corporate revenue continued to grow at a fast clip. This was largely because of higher commodity prices and sharp inflation.

Banks and Reliance Industries (RIL) together accounted for the bulk of incremental growth in corporate earnings in Q1FY23. On the other hand, IT services exporters, such as Tata Consultancy Services, and mining & metals companies were a disappointment on this front.

The combined net profit of 231 early-bird companies was up 20.4 per cent year-on-year (YoY) in Q1FY23, down from a 32 per cent YoY rise in Q4FY22 and a 76 per cent jump a year ago. These companies reported a combined net profit of Rs 78,825 crore in Q1FY23 — down 9.2 per cent from Rs 86,817 crore in Q4FY22; this is the lowest in three quarters and signifies the first contraction in corporate earnings on a QoQ basis after four quarters of earnings expansion.

The combined net profit of BFSI (banking, financial services and insurance) companies surged 44.3 per cent YoY to Rs 25,835 crore in the June quarter; RIL reported a 46.3 per cent YoY jump in net profit to Rs 17,955 crore. Excluding BFSI firms and RIL, the early birds’ combined net profit declined by 0.7 per cent YoY to Rs 35,036 crore — the lowest in seven quarters.

The combined net sales of these early birds were up 33 per cent YoY to Rs 6.5 trillion in Q1FY23. Top-line growth was visible across the board but the biggest jump was reported by RIL and mining & metal companies.

IT services firms, however, reported a slowdown in net sales growth during the quarter. The early-bird numbers also sug­g­ested a moderation in operating margins across the board for corporate India. 

Illustration: Ajay Mohanty

Operating margins tightened the most for companies in the mining & metals and IT sectors. The average operating margin (or Ebitda margin) for the early birds was down 150 basis points YoY to 28 per cent of total revenue in Q1FY23. In comparison, mining & metals companies’ Ebitda margin nearly halved during the period under review to 19.8 per cent of revenue in Q1FY23, from 33.7 per cent a year ago; IT services companies’ Ebitda margin tightened 411 basis points YoY to 23.7 per cent of revenue in the June 2022 quarter, from 26.8 per cent a year ago.

But banks witnessed better margins, thanks to faster growth in interest income and a sharp decline in provisions for bad loans.

The combined net profit of 23 IT services companies in Business Standard’s sample was up 1.9 per cent YoY in Q1FY23, their worst showing since Q1FY21. The sector's combined net profit at Rs 18,384 crore was the lowest in the past four quarters. Their top line, on the other hand, continued to grow in double digits but growth in the combined net sales at 18.4 per cent YoY was the weakest in four quarters.

Mining & metals companies, which were leading earnings growth until recently, emerged as the biggest laggards in Q1FY23 following a sharp decline in earnings despite strong double-digit growth in net sales. The combined net profit of 17 mining & metals companies, including JSW Steel, Hindustan Zinc, and Jindal Steel, was down 44.7 per cent YoY in the June quarter, their worst showing in the past two years. Their combined net profit at Rs 4667.1 crore in Q1FY23 was the least in seven quarters and also down 61 per cent from the record high of Rs 11,988 crore in the July-September 2021 quarter.

Still, the sector continued to grow as these companies’ combined net sales jumped 32 per cent YoY to Rs 67,145 crore in Q1FY23. Many industry leaders, such as Tata Steel, Hindalco, Vedanta, Coal India, Steel Authority of India (SAIL), and National Mineral Development Corp (NMDC), are yet to declare results for Q1FY23 and their numbers may change the trend.