Companies’ sales are increasing but their costs are also increasing

Mint analysis of 1,782 companies shows net sales rose 11.9% sequentially in July-September, down from 9.39% in the previous three months. Adjusted profit for non-recurring items climbed 21.5% in the September quarter, compared to a decline of 22.7% in the previous quarter.

The analysis does not include oil and gas and banking, financial services and insurance (BFSI) companies because they have a different business model. “I’ll summarize the season ahead of expectations on revenue growth and roughly in-line with respect to earnings. Be it credit growth pick-up or consumer spending, I think the growth has been better than expected. Growth outlook is positive. While revenue growth was ahead of estimates, the earnings picture was two-sided between consumer-facing companies and commodity-related companies. The consumption-oriented sectors which are commodity users of India Inc faced headwinds on the margin front,” said Tridip Bhattacharya, co-chief investment officer, equities, Edelweiss AMC.

He said commodity-related sectors delivered a positive earnings surprise, driven by higher commodity prices, while management comments, especially in pockets with pricing power, sought to neutralize the impact of commodity costs on margins in the coming quarters. Talk about growth.

The net profit margin of the companies under review during the quarter increased to 9.49% from 9% in the previous quarter. However, operating profit margin in the September quarter declined to 22.64% from 23.46% in the previous three months. Interest outflows were still lower, down 3.56% in the quarter, but raw material costs increased by 14%.

Dhananjay Sinha, managing director and chief strategist, JM Financial Institutional Securities Ltd, said a revival in consumer demand and normal activity levels at businesses led to sales growth, but broader raw material inflation is also emerging.

“Thus, operating profit at the aggregate level has missed expectations by 5%, but revenue has been ahead of the odd expectation by 5%. Margin pressure was most evident in sectors such as auto and cement. Despite this, the post-second wave of Improvement in demand, corporate performance over the next few quarters will be largely driven by higher material costs, rising crude oil and energy prices, impact of domestic coal and power shortages on various industries, higher raw material and logistics costs and wages. High inflation on cost and lack of supply of inputs/finished products imported from China, which is slowing down.It is clear that, depending on the pricing power, many companies will start raising prices to offset the input cost, ” They said.

Sectors like metals and pharma posted better quarterly earnings, while auto, consumer and infrastructure disappointed. For example, the net raw material cost incurred by Hero MotoCorp was 110 basis points higher sequentially even though it had hiked the prices. In 3,000 phases from April this year.

Analysts said margin pressure is visible across sectors and companies have said they will raise prices. However, there are concerns over possible demand impact due to hike in prices amid inadequate income realization, especially in the unorganized sector.

As evident from the September quarter earnings, the biggest risk ahead is margin impact on account of higher raw material prices. As a result, sectors such as auto, chemicals, consumers, infrastructure, telecommunications and utilities have seen a decline in earnings; In contrast, there has been some improvement in metal, oil and gas and pharma earnings, Sinha said.

The recovery in earnings is crucial to justify the current valuation of the Indian markets, as some global brokerage houses have already downgraded Indian equities.

“Despite the recent correction, Nifty continues to trade at 20.5 times FY13 earnings estimates. With the rise in COVID vaccination, urban recovery is likely to see a strong revival as cases remain low,” said Gautam Duggad, Head of Research, Institutional Equities, Motilal Oswal Financial Services Ltd.