Q1 results: Second wave of Covid-19 pandemic, higher costs take a toll

The quarter ended June 2021 was a disappointment for many sectors as hopes of a demand recovery seen in the January-March period were dashed by the second wave of Covid-19. Moreover, sharp surge in prices of commodities such as steel and energy hurt margins of companies across sectors, including automobile, FMCG and consumer goods, capital goods and infrastructure, among others, compared to the previous quarter. The comparison with the year-ago period is less meaningful, given the stringent lockdowns last year. Rising commodity prices, however, meant gains for producers of metals, which have benefited from continuous rise in global prices on improving prospects in major world economies. Likewise, increased global demand for digital services benefited the country’s IT services companies. Here’s an insight into the June quarter performance of some of India’s key sectors and companies therein.

FMCG & Consumer: Mixed bag for companies

• Fast-moving consumer goods (FMCG) companies also felt the heat of the second wave and the sharp rise in commodity and energy prices over the past year
• Consumer staple makers such as Hindustan Unilever, ITC and Nestlé, and paints major Asian Paints were impacted the least
• Consumer durable goods makers, retailers and quick service restaurants (QSRs) have been hit the most in the consumer pack
• Lifestyle retailers posted losses in Q1FY22, while QSRs and consumer durable goods makers reported a drop in earnings on a sequential basis
• FMCG companies did relatively better, but took a hit on margins over higher input costs
• Most analysts see a sharp recovery in companies such as Jubilant FoodWorks, Havells, Voltas and Titan while they have gone underweight on FMCG majors

Automobile: Struggling to switch gears

• Auto and auto ancillaries faced the double-whammy of demand slowdown due to the second wave of Covid-19 and record high metal prices
• Despite a YoY jump in sales in Q1FY22, the industry’s net sales were lowest in four quarters and 10% lower than the June 2019 quarter, excluding Tata Motors
• The biggest knock-on effect for companies was on margin. Automakers’ core operating profit margins hit a 5-year low due to a combination of lower volumes and high input costs
• Next three quarters may be better, but FY22 revenues may stay below FY19 level
• Tata Motors may be an outlier, thanks to its UK subsidiary Jaguar Land Rover

Capital Goods & Infra: Sales up, margins down

• Construction and capital goods firms suffered revenue loss during the second wave but YoY net sales were still up 
• Manufacturers such as BHEL and Siemens and construction firms like Larsen & Toubro took a hit on margins in Q1 due to higher input prices
• Power generators such as NTPC and Tata Power also reported double-digit growth in revenue and earnings (YoY) due to higher demand, but these were down sequentially.  Port operator Adani Ports grew the fastest, led by a revival in foreign trade and acquisitions
• Going forward, the outlook is brightest for port operators and road construction firms, while power firms and capital goods makers may continue to struggle

Cement, Metals & Mining: Strong show on record prices

• Metal and cement producers continued their dream run, thanks to a continued rise in their product prices 
• In Q1, metal and cement companies’ net profit was the highest as operating margins hit a new high
• Steel makers, like JSW Steel and Tata Steel, gained the most as metal prices rallied, followed by cement makers
• Non-ferrous metal prod­u­cers like Hindalco, Hindu­stan Zinc also did well
• Cement firms reported a sequential decline in net sales, indicating a moderation in demand due to the second wave
• Analysts expect a moderation in metal and cement prices as global supply chains normalise and fiscal stimulus in the developed world wanes   

IT – Software: Gains from rising demand, WFH

• IT Services companies such as Tata Consultancy Services (TCS), Infosys and Wipro had another good quarter of revenue and earnings growth, thanks to the tailwind created by the pandemic
• Companies gained from a surge in demand for IT services and decline in overhead expenses as most employees continue to work from home (WFH) 
• Second tier and mid-cap IT companies reported faster revenue and earnings growth while the industry leader TCS was a laggard 
• Going forward, analysts expect the industry to face margin pressure due to wage inflation that may test companies’ ability to sustain the earnings growth
• The sector’s price-earnings multiple is at an all-time high, which could limit the upside for investors even if earnings growth remains favourable

Bank & Finance: Earnings up, outlook slips

• Quarterly earnings of banks hit a new high in Q1FY22, but the industry outlook has deteriorated
• Earnings growth has largely come from a decline in interest costs and lower provisioning rather than the growth in loan book or higher interest income
• The YoY growth in gross interest income was lowest in at least four years
• Private sector banks were laggards hit by little growth in retail lending and a rise in bad loans in their retail book
• Public sector banks did better, but they, too, reported poor loan growth, which clouds their earnings outlook for FY22 
• Retail non-bank lenders such as HDFC and Bajaj Finance mirrored their banking peers with poor growth in loan book
• Insurance companies’ earnings were hit by a spike in claims due to Covid-19 and a slowdown in new premium income
• Most analysts expect the BFSI sector to underperform the broader market in FY22 

Oil & Gas: On a slippery curve

• Oil & Gas companies reported a sharp YoY jump in revenue and net profit in Q1FY22 due to higher crude oil prices and sales volume, but both the numbers were down sequentially
• Higher oil and gas prices meant higher margins for upstream companies like ONGC, but it hit margins of downstream oil refiners like Indian Oil Corporation
• Diversified major, Reliance Industries (RIL) benefitted from a global surge in the price and demand for petrochemicals products as developed economies opened but RIL’s retail business was hit by the second wave
• RIL's telecom business, on the other hand, delivered both YoY and sequential growth in revenue and earnings but growth seems to be tapering
• City gas distributor Indraprastha Gas suffered from a loss in demand due to the second wave, lead­ing to sequential decline in revenue and profit
• Going forward, gas companies are expected to do better than oil producers and refiners

Pharmaceuticals: Concerns after healthy show

• Pharmaceutical firms continued their good show in Q1 due to elevated demand for medicines 
• Biggest gains were reported by companies with a strong presence in the domestic anti-infectives segment such as Cipla and Sun Pharma
• The industry’s margins were, however, impacted by a rise in commodity prices just like FMCG companies
• Q1FY22 results also hint at pricing pressure in export markets that could impact the margins of companies with big overseas presence 
• Analysts see limited upside in the sector at current levels given record high valuations and a tapering off of post-Covid boost in revenues

(Price data as on August 18; Raw material includes power & fuel, purchase of finished goods, and increase and decease in stock; Bps: Basis points; YoY: Year-on-year; PBIDTM: Profit before interest, depreciation, and tax margin; YTD: Year-to-date; LTP: Loss-to-profit; NII: Net interest income; GNPA: Gross non-performing asset; Source: Capitaline; Compiled by BS Research Bureau)