Fourth quarter earnings of India Inc have been satisfactory despite sustained geopolitical instability, supply chain disruption, particularly in logistics, and a spike in key commodity prices.
Result Analysis: Nifty50 companies report healthy profit growth in March quarter
Top line growth at the Nifty level (ex-financials) was at 9.8% QoQ. Operating profit, however, was up 3.4% QoQ, factoring in the pressure on margins, which for the quarter was at 18.2%, down 110 bps QoQ. PAT for the quarter was up 5.3% QoQ, primarily tracking a decline in margins and other income, partially aided by a lower effective tax rate (26.1% in Q4FY22 vs. 27.9% in Q3FY22), according to the report.
ICICI Securities, in its report said, on a year-on-year (YoY) basis, topline (revenue) and bottom-line (profit) growth at the index level were healthy at 24% & 14%, respectively, and tracking commodity prices led to outperformance in the metals and oil & gas domain as well as healthy high double-digit growth witnessed in the IT & power space.
The management commentary across businesses was positive, it added. On the demand outlook amid a pick-up in economic activity, revival in public as well as private capacity expansion cycle but was wary of further input costs inflation resulting in broader price hikes and a tad soft margin trajectory.
At the Nifty level (including financials), the broader sequential growth trend continued with 8.8% QoQ growth in the topline. PAT growth, however, was a tad higher (6.1% QoQ) than ex-financials (5.3% QoQ) on account of outperformance by the BFSI domain, tracking better-than-expected credit growth and improving asset quality, it added.
|Nifty aggregate P&L (ex-financials)|
|Financials ( ₹in Cr)||Mar-22||Mar-21||Dec-21||YoY (%)||QoQ (%)|
|Expenses (% of sales)|
|Total Expenses||81.8||80.1||80.7||170 bps||112 bps|
|Raw Material||46.6||43.0||46.2||366 bps||39 bps|
|Employee||11.3||12.0||11.8||-72 bps||-53 bps|
|Other Expenses||23.9||25.2||22.7||-123 bps||126 bps|
|OPM%||18.2||19.9||19.3||-170 bps||-112 bps|
|Tax Rate||26.1||29.9||27.9||-377 bps||-180 bps|
|Source: ICICI Securities|
IT companies saw some moderation in revenues in Q4 in CC terms after witnessing strong growth in Q3. Tier I companies reported average constant currency growth of 19.9% on a YoY basis. Tier II companies posted even stronger CC growth at an average of 30.0% YoY.
ICICI Securities cut forward PE multiples for Nifty amid a rising rate hike scenario. Now it values Nifty at 18,700, 20*PE on FY24E.
Industry-wise revenue & profit movement
According to the report, in Q4FY22, topline growth on a QoQ basis was led by the capital goods space amid a seasonally higher execution period, followed by the metals amid firm metal demand and realisations. QoQ topline growth was also healthy across the oil & gas space (led by higher fuel prices) as well as the auto domain (commodity inflation led to a rise in APSs as well as improvement in volumes across certain segments, namely PV & CV).
FMCG industry saw 6% growth (according to NilsenIQ) in Q4FY22 led by double-digit pricing growth & volume decline. ICICI said that its FMCG coverage universe witnessed revenue growth of 12.2% almost entirely led by pricing growth. Volume growth was only strong for Varun Beverages & ITC cigarettes business.
|Industry wise aggregate revenue (Nifty 50) ( ₹in Cr)||Mar-22||Mar-21||Dec-21||YoY Change (%)||QoQ Change (%)|
|Oil and Gas||4,67,375||3,40,387||4,26,028||37.3||9.7|
|Source: ICICI Securities|
The report further said that the volume de-growth for FMCG companies was adversely impacted by muted volumes in rural regions given high inflation has negatively impacted real income levels, which, in turn, resulted in down-trading or shift towards regional/mass brands, it added.
In the cement space, against the backdrop of a higher fuel cost environment and freight charges, the industry witnessed a sequential margin expansion of 161 bps to 18.7% during Q4FY22. This was aided by controlled other costs and usage of low-cost fuel inventory backed by improved sales volumes during the quarter, the report added.
The industry utilisation levels improved to 86% vs. 75% in Q3 which aided in the fixed cost rationalisation leading to improvement in the margins. However, the pricing environment remained muted due to increased competition intensity.
Further, the report said, the performance was muted in the pharma space primarily driven by pricing pressure in international markets and high raw material as well as freight costs.
Sector-specific takeaways from the quarter
Auto & auto ancillary
The Q4FY22 saw the resurgence of the auto space's margin profile and earnings were led by double-digit QoQ volume growth in the CV & PV spaces; gross margin expansion for most OEMs amid calibrated price hikes undertaken to pass on raw material cost inflation; and operating leverage gains amid increased volumes and consequent topline.
Margin performance was particularly strong at Maruti Suzuki (9.1%, up 240 bps QoQ) and Ashok Leyland (8.9%, up 490 bps QoQ), which clearly outperformed the OEM pack. On an aggregate basis, ICICI said its auto coverage universe revenues were up 9.4% QoQ vs. their estimates of 7.2%, with EBITDA margins on a blended basis at 13.2% vs. estimates of 11%.
On the other hand, PAT growth was far ahead of expectations, at 54% QoQ vs. 3.6% expected, owing primarily to tacking margin expansion (both gross margins and o/p leverage benefits), the report said.
The banking sector witnessed an improved performance in Q4FY22 on various parameters like credit growth, asset quality, and profitability. On an overall basis, asset quality saw improvement as healthy recoveries and fewer slippages helped. The GNPA ratio for banks declined in the range of 10–70 bps, with the average drop being at 40 bps.
Even on an absolute basis, GNPA fell 3% QoQ and 11% YoY for the banking sector. The provision coverage ratio (cover against NPA) has inched up 150 bps QoQ to 72%. The restructured book also declined by an average of 25 bps QoQ, thus indicating an overall reduction in stress. Kotak Mahindra Bank saw the highest reduction in GNPA at 37 bps QoQ among private peers.
In the PSU space, SBI continued to maintain its healthy run on the asset quality front as GNPA was down 42 bps while restructuring also declined 10 bps QoQ.
NIM increased at Kotak, IDFC First, and Indusind, while it decreased at HDFC Bank and Axis Bank.
ICICI Securities believes that the next year will be a year of normalisation. It says the overall margins remain steady with some deviations among peer
ICICI Securities said it's capital goods coverage companies have delivered a mixed performance aided by regained operating activities and execution pickup despite challenges.
Revenue increased 17.4% year on year, while EBITDA decreased 0.4% year on year due to higher input and freight costs. As a result, adjusted PAT increased 6.7% year on year, aided in part by positive operating leverage, other income, and the base effect.
It expects Q1FY23E to see normalised topline performance, though the higher commodity price impact is likely to continue.
In the backdrop of the higher fuel cost environment and freight charges, the industry witnessed a sequential margin expansion of 161 bps to 18.7% during Q4FY22. This was aided by controlled other costs and usage of low-cost fuel inventory backed by improved sales volumes during the quarter.
The industry utilisation levels improved to 86% vs. 75% in Q3 and that aided in the fixed cost rationalisation, leading to an improvement in the margins. However, the pricing environment remained muted due to increased competition intensity, said ICICI securities.
There was a surge in crude prices by more than 40% during Q4FY22, leading to an upsurge in the majority of input costs. This, combined with higher power and logistics costs, contributed to the persistence of key concerns about the operational performance of the majority of chemical companies.
ICICI Securities said that its Chemicals coverage universe reported a strong set of numbers with revenues growing by 31.6% YoY to ₹13305 crore, while EBITDA and PAT jumped by 51.2% YoY and 77% YoY to ₹2767 crore and ₹1746 crore, respectively.
Further, topline growth was largely led by better realisations, while operational performance was driven on the back of better product mix and operating leverage.
The consumer durables sector reported better-than-expected growth in revenues at 15% YoY in Q4FY22, despite being on a higher base (+41% YoY in Q4FY21) and pandemic-led supply disruptions.
On the margin front, companies reported a 323 bps YoY EBITDA margin contraction in Q4FY22, dragged by higher raw material prices and delays in price hikes. In order to offset higher RM cost inflation, companies are planning a further price hike of 5% in Q1FY23 (of which paint companies have taken hikes of 2-3% already).
"We believe sharp price hikes (5% in Q1FY23 in addition to the 21% price hike in FY22) can lead to a risk of down trading, which can slow down gross margin recovery," said ICICI securities.
The FMCG industry saw 6% growth (according to NilsenIQ) in Q4FY22, led by double-digit pricing growth and a volume decline.
ICICI said its coverage universe witnessed revenue growth of 12.2%, almost entirely led by pricing growth. Only the Varun Beverage and ITC Cigarette businesses saw significant volume growth. HUL, Dabur, Marico, Tata Consumer, Nestle & Jyothy Lab saw flattish volume growth (0–4%) during the quarter on account of dismal demand conditions.
The volume de-growth for FMCG companies was adversely impacted by muted volumes in rural regions given high inflation has negatively impacted real income levels, which, in turn, resulted in down-trading or a shift towards regional/mass brands. Moreover, grammage reduction and the introduction of bridge packs have also been adversely impacting volumes.
FMCG companies have taken 5–15% price hikes in the last one year to pass on the huge commodity inflation. Some of the essential categories saw a tapering down of the growth from the high base of last year.
According to ICICI Securities, revenue growth in the near term (two quarters) will be driven solely by pricing growth. Despite the fact that agri-commodities have begun to experience inflation, companies with a high proportion of imported commodities in their raw material basket will continue to face pressure on gross margins.
After passing through initial hiccups in the first 20 days of Q4 due to the omicron-fueled third wave, the industry witnessed a sharp recovery in demand aided by leisure/transient travel, the wedding season, as well as a pick-up in business travel.
The majority of the hotel industry’s costs are fixed ( 70% of total costs), with power/lighting and employee costs taking the major share. As a result, ICICI said its coverage universe reported a sharp EBITDA contraction of 55% QoQ to ₹202 crore due to a fall in revenues. Reported margins came in at 16% vs. 28.9% in Q3 and 8.1% reported last year.
"We expect the launch of new hotel projects to get delayed due to higher land and input costs, which would augur well for the existing brand players." Furthermore, hotel players are now leaner in terms of costs that are sustainable in nature, "said ICICI Securities.
IT companies saw some moderation in revenues in Q4 in CC terms after witnessing strong growth in Q3. Tier I companies reported average constant currency growth of 19.9% on a YoY basis. Tier II companies posted even stronger CC growth at an average of 30.0% on a YoY basis.
However, margins continue to be under pressure for both Tier I and Tier II companies amid supply-side challenges. Tier I companies reported a margin swing of 10 to -189 bps QoQ. Tier II companies reported EBIT margin contraction of 33 to 160 bps QoQ, barring Coforge.
LTM attrition continued to be high. The hiring trend continues to be strong amid high attrition with higher fresher hirings by all companies.
The media sector saw a mixed performance among segments. Multiplexes had a relatively better quarter with a strong March collection. Broadcasters had a mixed ad performance with FMCG companies cutting ad spends & Sun TV posting superior numbers on the back of local retail exposure.
Multiplexes’ business saw a decent performance, led by a strong March 2022. Inox's revenues were at ₹317.7 crore (up 7.2 QoQ). The box office revenue was ₹202 crore (up 14% QoQ), led by footfalls at 11 million, up 17% QoQ, while F&B revenue was ₹87 crore and ad revenues at ₹13 crore. EBITDA (ex-Ind AS 116) was at ₹14 crore, with margins of 4.5%, as expenses went up on business resumption towards normalcy.
Metals and Mining
The metals and mining sector reported a mixed bag performance for Q4FY22, wherein while aggregate topline increased both on a QoQ and YoY basis, but aggregate EBITDA margins declined both on a QoQ and YoY basis on account of higher operating costs.
During the quarter, ICICI said its coverage universe increased by 39% YoY and 16% QoQ while the aggregate EBITDA margins decreased by 543 bps YoY and 151 bps QoQ to 19.8%. Consequently, despite healthy growth in the aggregate topline, aggregate EBITDA increased by merely 9% YoY and 7% QoQ.
Oil and Gas
Oil and gas companies reported a mixed set of numbers in Q4FY22. Oil marketing companies’ (OMCs') reported GRMs were lower than expected (mainly due to lower crude inventory gains), leading to weaker than expected EBITDA.
City gas distribution (CGD) companies reported better than expected earnings, driven by higher gross margins. Upstream companies’ revenue increased on the back of higher oil and gas realisation.
For a PSU upstream company, oil and gas production declined YoY. Oil realisation improved by 64% YoY (and 25% QoQ), while domestic gas realisation also increased YoY, leading to higher revenues. Profitability was sharply up YoY, driven by revenues. On a QoQ basis, earnings were flattish as the company witnessed higher expenses and DD&A costs.
Pharmaceuticals & hospitals
Pharmaceutical revenue increased 14.3% year on year to ₹45796 crore. Domestic branded formulations continued to drive overall growth due to: 1) traction for Covid related sales during the omicron wave; 2) normalisation in non-Covid sales in March; and 3) MR activity back to pre-Covid levels.
The domestic momentum, however, was neutralised by US businesses, which continued to face unprecedented pricing pressure.
Indian formulations (select pack) grew 15.5% YoY to ₹11043 crore, while US business (select pack) expanded 4.1% YoY to ₹12705 crore.
EBITDA margins fell 449 basis points year on year to 19% for I direct universe (select pack) due to 1) increased pricing erosion in the US; 2) increased input, logistic, and power costs; and 3) lower operating leverage at most manufacturing facilities.
In value terms, it contracted 6.2% YoY to Rs. 8,700 crore. Going ahead, margin pressure is likely to remain in H1FY23 along with higher expenses while companies work actively on alternatives for raw material dependency and new launches with better margin profiles. Net profit increased 13.7% year on year to ₹5195 crore.
Despite the omicron-induced slowdown in January-February, retailers displayed resilient performance, with demand picking up pace in the latter part of Q4FY22.
The revenue recovery rate for most apparel and footwear players continued to be above pre-Covid levels (100–105%), with Trent continuing to be the outperformer.
ICICI Securities said its retail coverage universe reported revenue growth of 15% YoY in Q4FY22, which was a tad better than anticipated. The store addition trajectory was enhanced significantly in Q4FY22, and companies have a healthy store addition pipeline for FY23E. On account of rising RM inflation, apparel players on average undertook price hikes in the range of 8-15%.
Airtel sub-base increased by 3.1 million QoQ to 326.0 million. Jio, VIL, lost 10.9 mn, 3.4 mn subs, at 421 mn and 243.8 mn, respectively. In terms of 4G subscriber additions, Airtel witnessed net adds of 5.2 million to 200.8 million during the quarter, while VIL saw addition of merely 1.1 million QoQ to 118.1 million.
For Airtel, overall margins were at 50.9%, up 169 bps QoQ, with India wireless margins at 50.6% (up 128 bps QoQ). The overall Indian margin increased by 106 basis points year on year to 50.8%. For VIL, reported EBITDA margins were up 613 bps QoQ to 45.4% owing to lower-than-expected network Opex (that was down 20% QoQ and had ₹150 crore of one-off benefits). Adjusted margins were at 43.9%. Jio’s margins were at 50.3%, up 110 bps QoQ.
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