Inflationary pressure on input costs shadows healthy revenue growth in Q2
The revenues for the BSE500 universe grew 24 percent year-on-year and 3 percent from the previous quarter. However, the inflationary pressures escalated the input costs which resulted in a mid-single digit YoY and sequential growth in operating profit
Auto sector had a good quarter, though there were headwinds from sluggish rural economic recovery and weakening global growth. Raw-material prices and chip-supply shortage began to wane, and festival demand help boost numbers, but there was diminishing of demand in entry-level and external-markets-facing segments. Two-wheeler maker Hero MotoCorp, which has the highest market share in the sub-110 cc category, saw its EBITDA and net profit drop by 3 percent and 10 percent YoY; and Tata Motors reported a healthy growth in consolidated revenue and profit, but its JLR volumes were disappointing. Bajaj Auto’s domestic volumes doubled, with 2W sales growing by 27 percent YoY and CVs rising 66 percent YoY; at the same time, its export volumes in two categories fell by -27 percent and -17 percent, respectively. Overall, the auto sector saw a good pick up in volumes and price hikes, and auto and financials were expected to drive Nifty50 profits.
2/12
Indian banks reported a surge in net profit for the September quarter, mainly driven by lower provisioning. Listed private sector banks reported a larger 63.8 percent growth in profit while public sector banks reported 50.0 percent growth. Operating performance was modest with core interest income growth being 24.4 percent for private sector lenders and 20.3 percent for public sector banks. Given the modest operating metrics, the operating profit growth was modest at mid-teens for both private and public sector banks. One drag on operating profit was elevated expenses. Most lenders reported marginal improvement in net interest margin for the quarter.
3/12
Traditionally, a weak quarter for the sector because of monsoons, the sector was plagued by the surge in energy and raw material costs. The situation was aggravated by the Inflationary pressures on other operating costs which impacted the profitability and margins further. The silver lining was the YoY increase in volumes for most of the cement companies as well as growth in realisations which resulted in a YoY revenue growth for the sector. The second half of the year is strong for the as the construction activity is at its peak. Pick up in volumes and price hikes will aid revenue growth while expectation of gradual reduction in energy prices will help the margins.
4/12
Chemical makers had yet another stellar quarterly earnings performance driven by strong demand environment from the year-ago period. Revenues, net profit and operating profit registered more than 20 percent growth on a year-on-year basis as the sector continues to benefit from new capacity addition and resilient demand in the export market. Sequentially, though, the picture was less satisfactory as revenues declined driven by muted demand from European markets plus sustained pressure from higher raw material and energy prices on margins of the companies.
Overall demand conditions for consumer durables companies remained muted in Q2. Furthermore, Q2 is a seasonally weak period for air-conditioners and fans. EBITDA margins fell on a year-on-year basis due to high cost inventory, higher employee expenses and normalising ad spends. Volume growth was subdued as entry-level products and mass segments saw demand pressure, while premium categories grew at a faster pace. Havells, Bajaj Electricals, Whirlpool reported decline in net profits while Voltas reported loss for the quarter. Blue Star managed to beat peers on back of growth in electro-mechanical projects and commercial air conditioning. Despite volatility in copper and aluminium prices, Polycab reported good set of numbers among wire companies due to remarkable growth of 75 percent in exports segment.
6/12
All FMCG companies recorded double-digit revenue growth on back of the price hikes taken in previous quarters to offset raw material cost inflation. However, margins contracted year-on-year, despite commodities like palm oil cooling off significantly from March-highs, as the companies were sitting on high-cost inventories. Consumer companies generally have 4-6 weeks of inventory. Analysts believe margins have bottomed out now and will see improvement in H2FY23. Volume growth was in low single-digits for most companies as rural demand reeled under inflationary pressures. While festive season saw uptick in demand, managements remain cautiously optimistic going ahead. Among staples, Britannia managed to beat analyst expectations and outperformed its peers with EBITDA margins expanding to 16.3 percent from 15.5 percent YoY.
7/12
Listed private sector life insurance companies reported modest improvement in value of new business (VNB) but a sharp accretion in VNB margin. VNB growth averaged between 2 to 6 percent year-on-year for life insurers. Business growth was flat on an annualised premium equivalent basis for private life insurers. On the other hand, state-run Life Insurance Corporation (LIC) reported a sharp improvement on both VNB and VNB margin. On embedded value, a key determinant of valuation, LIC fell woefully short versus its private sector peers. Listed private sector life insurers reported an increase of 8-20 percent for the quarter.
8/12
The IT Services sector’s dollar revenues witnessed a growth of ~11 percent on year on high base and a sequential growth of 2 percent. Despite the wage hikes by many companies, the operating margins for the sector recovered 50 bps on quarter but were down 270 bps compared to the same period last year. The aggregate operating profit grew 9 percent on year while the net profit was up 7 percent YoY. Deal wins witnessed upward trajectory and managements continue to exude confidence that the deal momentum will largely remain strong. In certain pockets however, the clients are becoming cautious on discretionary spending. Overall hiring slowed down during the quarter with some companies putting a complete freeze on hiring.
The global meltdown in commodity prices, slowdown in global demand amid recessionary fears, elevated input costs and imposition of export duty by the Government of India crippled the performance of the sector during the quarter. Domestic volumes in ferrous metals picked up with the de-stocking amid falling prices while non-ferrous segment continued to face challenges due to slowdown in China. Coal was the only outperformer aided by a dream run in prices. Going forward the volumes are likely to pick while coking coal costs are expected to reduce which should auger well for the sector.
10/12
Operating performance of oil and gas sector remained under pressure owing to global weakness in refining margins and inability of domestic oil marketing companies to pass on higher global crude oil prices to end consumers. That said, demand conditions remained robust during the September quarter driven by the reopening of the economy and festive season traveling. Going ahead, earnings are likely to remain under pressure for most upstream and downstream companies in the sector given shrinking global refinery margins as well as high under-recoveries for oil marketing companies.
11/12
A muted quarter for the sector given the high base of the year-ago quarter, which was boosted by the sales of COVID-19 linked treatment drugs. Export performance was decent for most pharmaceutical companies aided by new launches in the US market, which helped partially offset rising price pressure in the same market. Sun Pharmaceutical emerged as the biggest outperforming in the sector aided by ramp-up in sales of its specialty drug products in the US market. Going ahead, outlook for the sector remains moderately positive amid hopes of strong pipeline of products launches in export markets like the US and Europe.
12/12
A muted quarter for the sector given the high base of the year-ago quarter, which was boosted by the sales of COVID-19 linked treatment drugs. Export performance was decent for most pharmaceutical companies aided by new launches in the US market, which helped partially offset rising price pressure in the same market. Sun Pharmaceutical emerged as the biggest outperforming in the sector aided by ramp-up in sales of its specialty drug products in the US market. Going ahead, outlook for the sector remains moderately positive amid hopes of strong pipeline of products launches in export markets like the US and Europe.
