For a common sample of 2,509 companies, December was the fourth consecutive quarter of double-digit topline growth. Revenue grew by 23.8% on a lower base of 2.3% growth in the year-ago quarter. Net profit rose by 31.3% on the top of a strong 73% jump a year ago.
The sample’s profitability measured in terms of operating profit relative to revenue excluding other income, however, took a hit during the quarter marred by rising pressure of raw material costs. Operating margin fell by 350 basis points year-on-year to a seven-quarter low of 18.4%. The margin fall was higher than analysts’ expectation of 100-120 basis point drop.
Deepak Jasani, retail research head at HDFC Securities, noted that the quarterly performance was below expectations since the topline growth was aided by commodity price inflation while margins took a hit for the same reason. “Passing over of higher costs has not happened to the full extent due to competition or other reasons,” he said.
The cost pressure can be gauged from the year-on-year increase of 450 basis points in the sample’s raw material cost relative to revenue hitting a 12-quaretr high of 35% in the December quarter.
On a sequential comparison, the sample’s revenue increased by 9% while net profit grew by 2.7%. In the previous quarter revenue and profit had grown at a faster rate of 12% and 33.8%, respectively, following weakness in the June quarter due to the second wave of the pandemic.
It was a mixed bag on the sector front as some of the manufacturing segments were not able to pass on higher input costs effectively. “Among sectors, textiles, engineering, PSU Banks, footwear, select chemicals, steel, media and IT have done well. On the other hand, automobiles, paints, pharma, refining, consumer durables, cement sectors disappointed,” said Jasani.
After excluding banking finance and insurance companies, the sample’s revenue grew by 29.1% while net profit rose by 24.1% year-on-year.
The outlook for the immediate March quarter looks muted given sluggishness in industrial output though analysts believe a better growth momentum in subsequent quarters.
“Growth was reportedly stymied by raw material scarcity, inflationary pressures and the intensification of the pandemic,” IHS Markit noted in its January India manufacturing report while adding that factory orders rose at the slowest rate in four months but one that outpaced the long-run average.
According to Madhavi Arora, lead economist at Emkay Global Financial Services, high-frequency indicators suggest weakness in demand with economic activity losing some momentum in the two months to February 2022. In a recent report, she pointed out that the E-way bill collections in the said period are below the December level, which may moderate the GST revenue. “However, we expect this overall moderation to be a temporary blip as the relatively mild nature of the new variant and already declining infections mean that activity revival should resume from February,” she added.
According to Jasani, the margin pressure may continue in the March quarter as companies seem to have reached the end of cost optimisation measures amid the absence of large demand pull.
“The Nifty EPS estimates for FY22 may have to be cut, though marginally, after the completion of the results season and the extent of it will be known shortly,” He said.