Profits poor as input costs pressure margins

Although India Inc was able to report reasonably strong sales in the three months to December, 2021, elevated raw material costs left operating margins and the bottom line under pressure. Revenues rose a smart 33.5% y-o-y during the quarter for a universe of 185 early birds (excluding banks and financials) but the net profits for the sample increased by only 14.4% y-o-y. The results are positively weak if Reliance Industries and TCS are excluded; the net profit is virtually flat at an anaemic 1.3% while the top line growth is a more modest 24%.

To be sure, this is partly due to the huge Rs 7,300 crore loss posted by Vodafone Idea but profit growth has been weak, nonetheless. RIL and TCS account for almost half the sales for the sample.

Companies with strong brands were able to take price hikes but volumes were modest indicating inflationary pressures are clearly keeping demand subdued.
Smaller players are losing share to their bigger and stronger rivals as the high cost of raw materials erodes their competitiveness. Most managements point out the recovery in rural geographies, post the second wave, has been rather muted.

Volume growth was unexciting for many. At Bajaj Auto, volumes for motorcycles fell 20% led by a shortage of chips and slowing demand as the cost of ownership increase. Volumes at Ultratech declined 6% y-o-y during the quarter primarily hurt by heavy and unseasonal rains in some places, bans on construction in some areas and a shortage of labour. At Ceat, they were down 4.5% y-o-y.

Some firms were able to take price increases. Asian Paints has been able to hike prices by about 22% in the nine months to December to combat a 25% rise in input costs. Despite this, it managed to grow its volumes by a strong 18% in the December quarter.

Hindustan Unilever was able to report a reasonably strong top-line growth of 10% y-o-y thanks to price increases of around 9% y-o-y although volumes increased by just 2%.

Blended realisations at Ultratech increased to by 12% y-o-y as it was able to sell more premium products. However, the cement manufacturer’s Ebitda fell 25% y-o-y.

Raw material costs for the sample jumped a huge 632 basis points, leaving margins under pressure. Bajaj Auto’s Ebitda margin, for instance, contracted 420 basis points y-o-y driving down the Ebitda by 21% y-o-y. At Ceat, Ebitda margins crashed 920 basis points as raw material costs soared to 66% of sales. At Havell’s, gross margins crashed 583 bps driving down by Ebitda margins by nearly 400 bps; although sales increased by 15.4% y-o-y, the Ebitda fell by 13.3%.

The IT pack put on yet another good show, reporting good revenues and profit margins prompting analysts to upgrade earnings estimates. Revenue growth at TCS was broad-based across verticals. Infosys’ performance too was a strong one as it demonstrated good execution. The recovery has seen retailers get back on track; Shoppers Stop, for instance turned debt-free in Q3FY22, posting a stand-alone revenue growth of 34% y-o-y, albeit on a low base.