Rise in commodity prices reduced second quarter profit of Indian industry

While net sales grew a strong 30% from a year ago, profit before interest tax depreciation and amortization declined 8.3%, showed a Mint analysis of 432 companies that had excluding banks and financial services for the September quarter. Results have been declared. Net profit fell 24%.

Analysts said the pressure on profitability was due to high-cost inventory that companies are carrying. The impact of the rise in commodity prices, which peaked during the June quarter, was felt in the September quarter as well. He said the benefits of subsequent fall in raw material prices would be most visible in the following quarters as companies place advance orders for raw materials.

AK Prabhakar, Head of Research, IDBI Capital said the September quarter earnings have been mixed. Prabhakar said while the earnings of banks and IT companies have been strong, there has been disappointment due to higher commodity prices in metals, cement and some other sectors.

Manufacturing sectors such as steel and cement have seen significant pressure on profitability due to higher coal and other raw material costs. Tata Steel saw its consolidated Ebitda fall by nearly 60% sequentially, while JSW Steel reported a loss at the operating Ebitda level. Tata Steel said the decline in receivables in India and lower sales in Europe led to lower margins due to use of high-cost inventory. Analysts said the profitability per tonne of cement companies like ACC, Ambuja Cements and UltraTech Cement saw a decline of 34-96% sequentially.

Deepak Jasani, Head of Retail Research, HDFC Securities Ltd, said cyclical companies have reported pressure on their performance as realizations have been unable to keep pace with costs. As a result, profitability came under pressure despite solid revenue growth, he said.

Margin pressure was also witnessed in the consumer sector. Amnish Aggarwal, head of research, Prabhudas, said, “Revenue estimates for the consumer sector are in line with actuals at a variation of 0.4%, while EBITDA and net profit are projected slightly higher at a variation of 3.6% and 4.5%, respectively.” Liladhar Private Limited

Agarwal said the earnings season is showing positive turnaround among the banking sector, with the numbers projected in terms of revenue, EBITDA and net profit at 2.2%, 4.3% and 5.4% respectively.

The sector that really caught the attention of analysts remained the automobile sector.

Manish Jain, Fund Manager, Coffee, said, “We expect strong growth, given the festive season and a sharp decline in system inventory, so despite the positive growth, we will continue to expect a strong movement in the coming quarters.” PMS in Ambit Asset Management. Jain is bullish on banks and said that strong growth and continuous improvement in asset quality, coupled with cheap valuations, make it a very attractive case to stay positive.

With strong growth in both rural and urban areas, the current earnings season has so far surpassed investor expectations. However, while the September quarter has been good, Jain does not expect it to be a major driving factor for the markets.

The direction of the market will be determined by how the December quarter turns out and more importantly, management’s comments. On the positive side, analysts expect momentum to pick up in the festive season and the current quarter as a base effect.

IDBI’s Prabhakar said with liquidation of high-cost inventory, margin pressure may start to ease from the current quarter. He said demand remains strong and volume growth remains encouraging.

However, the export-oriented sectors are likely to remain under pressure. Analysts are also cautious about the outlook for IT companies. Jasani said companies have seen deal wins, but big deal wins have been slow.

Jasani said healthcare performed better than expected in the September quarter. Prabhakar said pharma companies in export-oriented sectors may be surprised by the positives as the price pressure in the US is easing.