Cooling Commodities Hot Q4 Earnings

Net profit is likely to accelerate due to fall in raw material cost. Analysts said the benefit of reduction in commodity costs is visible and lower costs mean that margins of companies are improving, leading to improvement in earnings.

Data analyzed for 272 companies excluding banks and financial institutions Peppermint Shows that the net profits have improved by 27.75% sequentially, though they are still down 5.7% year-on-year (YoY).

Sushant Bhansali, chief executive officer, Ambit Asset Management, said, “Early trends are indicating good earnings as most companies are beating estimates.”

Bhansali said that 25 Nifty companies that have reported results have posted double-digit growth in earnings, but if commodity sector firms are excluded, the growth rate jumps to 21%.

Earnings are being driven by improving operational performance, even as net sales grew only 1.25% sequentially, data seen by Peppermint,

On a year-on-year basis, the net sales of 272 companies grew by 7.5%, the slowest pace in the last nine quarters. Slower revenue growth indicates that the effect of inflation driving revenue growth is now waning.

The increase in prices due to rising input costs has supported revenue growth over the past few quarters.

Analysts say volumes could remain under pressure in some cases, as inflation was affecting affordability. Analysts said it is the improvement in operating performance that remains a major positive. The data indicates that the profit before interest, tax, depreciation and amortization for 272 companies improved by 15% sequentially.

AK Prabhakar, head of research, IDBI Capital, said raw material costs have come down and the cost structure for manufacturing companies has improved significantly.

This is helping companies to increase EBITDA (earnings before interest tax depreciation and amortization) per tonne.

VK Vijayakumar, chief investment strategist, Geojit Financial Services, said one of the key takeaways from the Q4 results is that the FMCG and two-wheeler segment results are showing a revival in rural demand.

Auto has generally done well, two-wheelers have delivered better-than-expected results and FMCG results are good, and Nestle has shined, he said.

Meanwhile, the caution taken regarding the effect of recession and global slowdown, its effect was also seen in the IT services sector. Vijayakumar said that large-cap IT, especially Infosys, has been disappointing while mid-cap IT is doing very well with optimistic guidance.

Analysts pointed out that mid-sized companies in the IT, chemicals and metals sectors saw healthy revenue growth, while hotels, paper, sugar and retail saw healthy growth. However, textiles and major metals disappointed.

Overall, the results are broadly better than the last few quarters.

“Profitability has improved and earnings are showing signs of recovery despite rising interest and depreciation costs,” said Deepak Jasani, head of retail research at HDFC Securities.

Interest costs are rising rapidly, taking away some of the benefits of improving operating performance. Analysts said though this is on account of regular increase in interest rates, rising working capital requirements may also have contributed to it. Besides, the ongoing huge capital expenditure for many companies could also be one of the major reasons, he added.

At a broad level, earnings are in line with estimates so far, however, Bhansali said, sectoral divergence is visible, with IT seeing a 3% decline in earnings, while financials, auto and utilities seeing an upgrade of 1-2% Went.

Large cap pharma companies, metal companies and most of the upstream and downstream oil and gas companies and large PSUs are yet to announce their financial results. Experts said these are early trends and a divergence in trend cannot be ruled out as we move into the earnings season.