Inflation will weigh on Q1 profit margins; cooling commodity prices will be reflected in Q2 numbers


With many companies expected to report a sequential decline in earnings, the June quarter earnings season is expected to be lackluster. From autos and banks to building materials and metals, most sectors were hit either by runaway inflation or by rising interest rates, depreciating rupiah and rising commodity prices raw.

While demand held up quite well and the services sector rebounded strongly in June, supply-side shortages and high raw material costs hurt production and margins respectively. The sales and profit figures will, of course, be very good compared to the weak quarter of June 2021, when business was hit hard by the second wave of Covid-19. The benefits of cooling commodity prices would show in the September quarter results.

Net earnings of the universe of stocks tracked by KIE are expected to fall by 16% quarter-on-quarter (qoq); for ESB 30 companies, they are estimated to fall by 10% and for Nifty50 by 11% sequentially.

Automakers’ revenues are expected to decline slightly quarter over quarter, mainly due to a shortage of chips which has impacted PV production volumes, as well as lower commercial vehicle volumes due to the seasonal effect.

The recovery in two-wheeler volumes coupled with an increase in average consumer spending is expected to push the numbers higher.
However, high commodity prices would have dented operating profits, which are expected to fall sequentially.

The consumer goods pack is very patchy, but most companies should show reasonably good volumes, despite high inflation. Value growth would be strong and expected to be in the double digits for most companies, especially year-over-year. However, gross margins would be under pressure, despite price increases, and would weigh on the profitability of most stables and discretionary businesses.

At the same time, demand for durable consumer goods, although quite strong in April and May, thanks to the harsh summer, moderated somewhat in June. “Price increases were minimal and limited to a few products and the premium segment was relatively less impacted than the mass segments,” observes an analyst.

Cement makers were reportedly hit by rising fuel costs – petroleum coke and thermal coal – as well as higher freight costs. As a result, despite better performance, Ebitda (earnings before interest, tax, depreciation and amortization) per ton is expected to be down 10-12% QoQ.

Software publishers’ margins are expected to contract sequentially – by 100 to 400 basis points – thanks to higher retention costs, driven by higher attrition and travel expenses. At TCS, for example, Q1FY23 Ebit margin slipped to a multi-year low, declining 190 basis points sequentially to 23.1%. The impact of the wage increase alone was 150 basis points.

While net interest income should have risen nicely with the growth in loans, the steep cash losses would lower bank profits. Results would be boosted by lower provisions for loan losses. Upstream oil and gas companies will see good earnings growth – average Brent prices crossed $110 a barrel, up $9 a barrel from the end of March. However, OMC is likely to report lackluster numbers and may even show losses due to under-recoveries in automotive fuel and LPG.


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