India Inc likely to see robust Q4 nos despite input cost pressure: Analysts

The fourth quarter of financial year 2021-22 (FY22) has been a difficult period for India Inc. as it was marred by a number of headwinds such as rising inflation, steep rise in input costs and supply disruptions brought on by the Russia-Ukraine offensive. 

The trouble has been mirrored by the equity markets as reflected in their underperformance this year and the correction from their October, 2021 highs. The Nifty50 and the Sensex are around 3 per cent down from last year’s peaks. 

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Despite the current challenges, analysts expect the March 2022 quarter (Q4-FY22) domestic corporate earnings to be resilient, supported by strong economic recovery, and delayed impact of inflation. This, they feel, has been somewhat reflected in the recent goods and service tax (GST) collection. Besides the numbers, the guidance on the margins front will be keenly watched by the Street amid the ongoing geopolitical tensions.

“We expect a robust earnings season in Q4-FY22 given signs of economic revival such as March GST collections, which came at all-time high. Moreover, any major impact of inflation, which is a key talking point at present, will only be seen in the next quarter as the rise in commodity prices was seen in March,” said Santosh Meena, Head of Research, Swastika Investmart.

The next two quarters, according to analysts at Motilal Oswal Securities, are likely to see a sharp margin impact and corporate commentaries will worsen before they get better. Secondly, while the Nifty has not seen much earnings downgrade so far (thanks to upgrades in Metals/O&G and neutral to no impact in IT/BFSI), the broader universe is clearly bearing the brunt of commodity cost inflation – a trend we saw even in Q3-FY22 corporate earnings season. 

“If the input cost situation does not improve and price increases become inevitable, we are not too far away from some demand dislocation in an already weak economy. And this, at some point in time, will lead to earnings downgrade even for the Nifty,” they wrote in a recent report.

According to analysts at HSBC Global, fiscal 2021-22 (FY22) and FY23 headline Nifty earnings outlook remains resilient at 37 per cent and 19 per cent, respectively, and has not seen many downgrades at the index level yet. They estimate FY23 Nifty50 earnings per share (EPS) growth to come in at 18.9 per cent on a yearly basis. However, they caution that a prolonged period of high commodity prices pose downgrade risks. 

The winners

For the recently concluded quarter, high crude oil prices, according to Meena, are likely to have benefitted upstream companies like ONGC and Oil India, while he expects a sharp margin pressure for oil marketing firms (OMCs) and city gas distributors (CGDs).

“Commodity producers such as Metal players will be in a sweet spot and fertilisers and sugar companies may also post strong earnings. Other likely frontrunners include Banks, which are expected to continue their steady performance amid economic recovery,” he said.

… And laggards

On the flip side, Auto and FMCG companies are likely to be the worst hit amid persistent inflationary tailwinds since the last many quarters. 

“Autos and FMCG sector earnings expectations have come down given demand conditions look unfavourable in the near-term,” said HSBC Global. 

The price hikes that companies are taking are likely to further dampen demand outlook, analysts said. Similarly, cement companies’ margin pressures may dent their profitability despite a likely good traction in volumes. 

This apart, any cue on Russia-Ukraine truce will be a positive catalyst for markets, given current supportive valuation with Nifty50 near its five-year average one-year forward PE of 19 times, and FII outflows that appear to have peaked now, according to HSBC Global.