Slowing profits

Inflation is affecting demand and margins

The January-March 2022 quarter results of 2,939 listed companies (minimum net sales of Rs 1 crore) indicate economic growth continues, but there are headwinds of high inflation and weak consumption demand. Ignoring volatile segments like oil and gas, refining, banking and non-banking financial companies, India Inc has seen a 19 per cent rise in net sales and 40 per cent increase in “other income”. This has led to a 16 per cent rise in operating profits (EBITDA) and 24 per cent rise in profit after tax (PAT). Expenses are up 19 per cent and operating margins are down. In the so-called volatile sectors, for banks credit has expanded by 9 per cent, which is encouraging but below–par compared to expectations. Banks registered 89 per cent growth in PAT on lower provisioning for bad debts. This fiscal year will be difficult since the Reserve Bank of India is now hiking rates. Oil and gas producers saw a 70 per cent rise in profits due to the steep price hikes, and power and fuel expenses jumped by over 30 per cent for the entire sample. Oil refiners and marketers saw severe pressure as their gross refining margins contracted due to high crude oil prices.

The auto ancillaries segment saw strong gains in profitability but the volumes did not rise much. Auto manufacturing presents divergent trends. Mahindra and Maruti have done well. But the two-wheeler majors have all seen profit erosion and the tractor segment has stagnated. Tata Motors’ JLR is still registering losses. Rural demand seems muted, given the strong relationship with two-wheelers and tractors. This impression is reinforced by a weak performance from FMCGs, which have single-digit growth in sales and profits. The construction cycle is seeing more activity. Although this has led to better offtake of cement, margins are under pressure across construction and infra-development and for the cement industry as well. Other key commodities involved in construction, such as steel and non-ferrous metals, continued to rally with international prices remaining elevated.

Power generators had an excellent quarter and passed on the rising costs, but there’s a red flag in terms of a rising tide of receivables from state discoms, and this payment delay is affecting key supplier Coal India as well. Power and transport costs are huge inputs for cement and metals producers. While metals producers have passed on those costs, cement has struggled. The export duty will hurt steel plants. The IT industry has done well with a 21 per cent rise in revenues and 45 per cent increase in PAT (constant currency terms). But the majors have issued cautious guidance, pointing to high churn and margin pressures as counterbalances to the weak rupee. The pharma industry is still seeing supply chain disruption and profits were flat. Making sequential quarter-on-quarter comparisons, it is clear profitability growth has slowed. While the base effects are coming into play, the reason is essentially a steep inflationary spiral, which in turn has triggered low demand. A tighter monetary regime has been initiated, which could impede future demand growth. Government spending is picking up some of the slack, going by the rise in construction. But guidance from most major corporations and also the broad trends in balance-sheet data suggest growth rates will level off in 2022-23.