Did inflation hurt India Inc more than what markets expected in Q1?

A look at the June quarter earnings presents a mixed picture of India Inc. While commodity users bore the brunt of elevated raw material prices, commodity suppliers enjoyed abnormally high profits.

Profit margins, however, squeezed across the board as corporates couldn’t pass on the entire increase in costs to consumers. 

Analysis of about 1,940 companies, excluding financials, shows that while aggregate net profit rose from 1.41 trillion rupees to 1.58 trillion rupees on a year-on-year basis in Q1FY23, the aggregate profit margin contracted from 7.9% to 6%.

Sequentially, net profit fell from 2.03 trillion rupees, and margin shrank from 8.3%.

Within the Nifty50 universe, profits of the 31 Nifty companies, that had released their results till the end of July, rose 12% YoY, single-handedly driven by BFSI. If one were to exclude banks and financials, the profits would have declined 1% YoY.

Analysts say unusually high inflation was the biggest sore point for earnings. Jitendra Upadhyay, Senior Research Analyst, Bonanza Portfolio, says high inflation and consequent price hikes have hit demand. Managements cautioned against demand slowdown. Certain sectors saw reduced growth guidance, he says.

On its part, the Reserve Bank of India has hiked repo rate by 140 basis points, and cash reserve ratio by 40 bps so far in FY23; yet it has kept FY23 inflation estimate unchanged at 6.7% YoY.

Market mavens say the status quo on inflation above the upper tolerance level of 6% entails risk of destabilising demand expectations. Overall, FY23 earnings have been downgraded by over 4% driven by aviation, metals and energy.

Going forward, earnings growth will hinge on commodity prices. Vetri Subramaniam, Chief Investment Officer of UTI AMC, for instance, believes, “With the retreat in commodity prices, the worst of the margin pressure is behind us. Earnings estimates in sectors where volumes and pricing are sensitive to global growth trends could see challenges as concerns about growth.”

Motilal Oswal, too, says, “Earnings miss by heavyweights Reliance Industries and Tata Motors led to aggregate earnings miss in Q1FY23. However, as the benefit of the recent moderation in commodity costs start accruing in the second half of fiscal 2023, we expect laggards of Q1 to contribute in growth.”

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