Q3FY22 Earnings: Results strong but masks many weak pockets

While normalcy returned to most parts of the country in the December, 2021 quarter, the economic recovery does not seem to have gained the kind of momentum one might have hoped for. Despite it being a period of festivity, consumer demand wasn’t particularly strong, possibly because of the inflation in product prices and also because the services sector — which employs large numbers — hadn’t fully recovered.

As such, while India Inc’s aggregate results for the quarter will be impressive, they would be driven primarily by four or five sectors — IT, metals, BFSI and oil & gas. A fairly large number of companies —30% — could report a year-on-year fall in profits. At the same time, close to 40% of firms will likely report a profit growth of more than 15%.

The strong aggregate headline growth will hide the weak spots including automobiles, consumer durables and construction materials; it will also camouflage the quality of earnings of banks that will have gained more from lower loan loss provisions rather than their core business. That said, the quality of balance sheets should improve for most firms as the de-leveraging continues and given India Inc staged a strong recovery in FY21, post the outbreak of the Covid-19 pandemic, and built on that in H1FY22.

IT companies are tipped to turn in strong revenues sequentially, in a seasonally weak quarter, resulting from high level of migration to Cloud, and transformational spends. While upstream players in the oil and gas sector will have gained from better realisations, marketers and refiners would benefit from better margins.

Banks will likely report strong bottomline growth even though the operating performance in terms of topline growth and pre-provisioning profits could be ordinary. Volumes reported by auto makers, primarily for two-wheelers and tractors, in the December quarter were modest, suggesting pressure on toplines and margins. The shortage of chips resulted in lost demand for manufacturers of passenger vehicles.

With the economy recovering, makers of capital goods and construction players are expected to report better execution and bigger order books. The margins could be impacted by higher commodity prices. Demand for materials like cement was strong early in the quarter as the festive season set in but moderated thereafter due to unseasonal rains, limited availability of labour and some localised restrictions on construction activity. Kotak Institutional Equities (KIE) expects net profits for the BSE-30 Index to increase 19% y-o-y and 1% q-o-q and for the Nifty-50 Index to increase 20% y-o-y and 3% q-o-q.