Following a strong showing in Q2FY22 in which India Inc’s profits jumped 55% year-on-year, corporate earnings are expected to continue their good run for another 12-18 months.
The expectations are based on the recovery in the economy. Kotak Institutional Equities (KIE) expects net profits for the Nifty 50 set of companies to grow a smart 34% in the current year and a good 15% in FY23, on a normalising base. These estimates — up 0.5% and 1.4% respectively — are a shade higher than at the start of the earnings season; they have been made primarily in metals and mining, oil and gas, on the back of expectations global prices are going to remain elevated.
These upgrades offset the downgrades in the earnings in the automobile, consumer staples and other discretionary sectors where revenues have been hit by input shortages and margins have been under pressure. However, analysts caution inflation might crimp in demand; the rebound in revenue growth, they worry, could moderate.
Already strategists at Edelweiss point out that from being broad-based in FY21, profit growth has narrowed in FY22 so far, having been driven mainly by earnings of commodity players and market leaders.
Worryingly, profits have been weaker in domestic consuming -facing sectors. Some of this could be the result of weaker demand in rural India where the wage growth for the non-agri sector has been muted. Also, the pent-up demand, post the second-wave of the pandemic, has found an outlet in consumer services, rather than in the goods segment.
This trend could continue to play out economy opens up further.
Although top lines rose smartly in Q2FY22, rising 29% year-on-year for a universe of 2,500 companies, a good part of this was led by elevated commodity prices, leaving several soft pockets. Excluding commodities, the growth slips to low double digits, despite a push from pent up demand, an inflationary environment and a favourable base. Moreover, although the net profits surged 55% y-o-y, the operating profits increased by just 28% y-o-y. The sum of the operating profit and wages — a proxy for gross value added — increased a strong 23% y-o-y.
Loan growth remained subdued during the quarter and the growth in pre-provisioning profits for banks slowed during the quarter. Although the macro-fundamentals remain robust and there is the promise of the recovery gaining momentum, analysts are concerned about the expensive valuations and probability of earnings slowing for some sectors; margin pressures, they feel, could persist in an inflationary environment.