The Q2 earnings season has begun with some hits and misses. We have seen some moderation in profitability compared to Q1FY23. To gain more insights on the earnings front, let us first look at how corporate India has fared so far. Below is a summary of aggregate earnings:
Let’s dive deeper…
While the early bird results show moderation in quarterly profits, margins seem intact as there is no slowdown in the top-line growth.
Hits:
The sector has been the top-performing sector for Q2FY23. It has contributed significantly to the net profits. They have seen a profit growth of 61% YoY; similarly, the combined net profit of finance companies, including asset management, stock broking & insurance companies, went up 13.8% YoY to a record high of Rs.11,800 crores in Q2FY23.
The resumption of economic activity has led to improvement in the asset quality of banks. Quicker pass-through of lending rates compared to deposit rates boosted the banks’ overall profitability. Shrinking deposits will be the critical determinant for the profitability going ahead.
Tata Consultancy Services, HCL Tech, and Infosys, primary IT services exporters, have surprised on the upside. They have seen a Q-o-Q rise in overall operating margins and faster growth in rupee revenues, led by gains from currency depreciation.
Here’s our brief coverage of earnings of the big four IT services companies (https://bit.ly/3WsmXxf)
Misses:
This has been a challenging quarter for nonfinance companies. Most large manufacturing companies have reported a decline in profits. Metals, mining, cement, and oil and gas were the biggest laggards during the quarter. These sectors reported a sharp decrease in net earnings due to higher operating costs and lower sales realizations. Moderation in commodity prices also slowed down the growth in sales of a few industries.
It is reflected in depressed growth in net sales of mining and metal companies and, to a lesser extent, chemical companies. JSW Steel, the country’s second-largest Steel manufacturer, has reported a net loss for September 2022. Amid all the clutter around commodity-centric companies, consumer goods industries such as cosmetics, food, toiletries, and transport equipment continue to report robust sales and profit numbers. High inflation does not impact the sales of consumer goods companies.
However, the net profit margins of nonfinance companies are holding up better than expected. The overall growth has still been better than pre-pandemic levels. We expect margins to stabilize in the upcoming quarters and remain higher than the pre-pandemic levels, and robust top-line growth will keep profits elevated.
Investor Takeaway:
The overall profits of listed companies are thus anticipated to stay substantially elevated compared to pre-Covid times but may fall compared to the current outstanding profit levels. Slowing global growth, high-interest rates and volatility in commodity prices are key risks to growth & earnings from now on.
On a sectoral front, sectors dependent upon domestic demand & that can pass the input cost pressure to the end consumer are a better place.
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