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Q4 results leave previous results behind

07 May 2023, 10:00 pm

The early trends from the March quarter performance of corporate India remain encouraging as earnings that have been under pressure over last few quarters are now showing a sharp sequential improvement.

The rebound in net profits is likely to have been driven by a decline in raw material costs. The benefits of easing commodity costs are visible and lower costs mean companies are seeing margin improvement, leading to improvement in earnings, said analysts.

Data of 272 companies, excluding banks and financial entities, analysed by Mint shows that net profits have improved 27.75% sequentially, though they are still 5.7% lower year-on-year (y-o-y).

“Early trends suggest a good earnings season with the majority of companies surpassing estimates," said Sushant Bhansali, chief executive officer, Ambit Asset Management.

The 25 Nifty companies that reported results showed double-digit earnings growth, but if one excludes firms in the commodities space, the growth shoots up to 21%, said Bhansali.

The earnings are being driven by an improvement in operating performance, even while net sales have risen only 1.25% sequentially, suggests data seen by Mint.

On a y-o-y basis, net sales for 272 companies have grown 7.5%, the slowest in the last nine quarters.The slow revenue growth indicates that the inflationary impact driving revenue growth earlier is now easing.

Price hikes, taken on the back of rising costs, had been aiding revenue growth in the past few quarters.

Analysts said volumes could have remained under pressure in some cases with affordability being impacted by inflation. That said, it is the improvement in operating performance that remains a key positive, analysts said. The profit before interest, tax, depreciation, and amortization has improved 15% sequentially for 272 companies, indicates the data.

AK Prabhakar, head of research at IDBI Capital, said the raw material costs have come down and there is significant improvement in cost structures for manufacturing companies.

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

An important takeaway from the Q4 results is that rural demand recovery is visible in the results of FMCG and two-wheeler segments, said VK Vijaykumar, chief investment strategist at Geojit Financial Services.

Autos have generally done well, with two-wheelers delivering better-than-expected results and FMCG results are good, and Nestle has sparkled, he added.

Meanwhile, as caution prevailed on the effect of recession and global slowdown, its impact was visible in the IT services sector. Vijaykumar said large-cap IT, particularly Infosys, has been disappointing while mid-cap IT is doing very well with optimistic guidance.

Analysts pointed out that mid-sized companies in IT, chemicals and metals sectors have seen good revenue growth, while hotels, paper, sugar and retail have seen good sales growth. However, textiles and large metals have disappointed.

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

“There has been turnaround in profitability and signs of improvement in earnings are visible despite rising interest and depreciation costs," said Deepak Jasani, head of retail research, HDFC Securities.

Interest costs have been rising sharply, taking away some benefits of improvement in operating performance. While it is due to the regular increase in interest rates, the rising working capital requirements could also have contributed to it, said analysts. That apart, large capex underway for many companies could also be amongst the key reasons, they said.

At a broader level, earnings are in line with estimates so far, however, sectoral divergence is visible, said Bhansali, adding that IT saw earnings downgrades of 3%, while financials, auto and utilities saw upgrades of 1-2% each.

To be sure, large cap pharma companies, metal companies and most of the upstream and downstream oil and gas companies and large PSUs are yet to declare their financial results. Experts said that these are early trends, and as we progress in the earnings seasons, a divergence in trend may not be ruled out.

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