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India Inc continued its good showing in the December 2021 quarter with combined net profits of 3,191 listed companies in the Business Standard sample up 26.9 per cent year-on-year (y-o-y) and their net sales increasing 24 per cent.
As in the previous quarter, growth in earnings was led by cyclical sectors such as banks, non-banking financial companies and insurance (BFSI); metals and mining companies; and oil and gas producers while manufacturers struggled with higher input costs, lower margins, and sub-par revenue growth.
While it was the sixth consecutive quarter of high double-digit growth for India Inc, earnings in Q3FY22 were the lowest since the September 20 (Q2FY21) quarter.
For example, the combined net profits were up 49.1 per cent y-o-y in Q2FY22 and earnings increased nine times in Q1FY22 due to a low base effect.
The listed companies in the Business Standard sample reported combined net profits of Rs 2.39 trillion in Q3FY22, up from the Rs 1.88 trillion a year earlier but down marginally from the Rs 2.4 trillion in Q2FY22.
Top line growth was, however, higher in Q3FY22 than in Q2FY22 and this was especially true for the non-financial companies, which are facing the brunt of higher commodity prices and inflation.
Analysts see a further downside in earnings in the forthcoming quarters.
“Most of the incremental growth in earnings came from select sectors and companies while top line growth came from price hikes rather than higher volumes. A majority of companies are battling rising operating costs, which could compress earnings,” said Dhananjay Sinha, managing director and chief strategist, JM Finance Institutional Equity.
The listed companies in the sample reported net sales of Rs 27 trillion in Q3FY22, up from the Rs 21.76 trillion a year earlier and Rs 24.67 trillion in Q2FY22. Including other and exceptional income, revenues grew to Rs 28.46 trillion in Q3FY22 against Rs 23.5 trillion a year earlier and Rs 26.42 trillion in Q2FY22.
The companies in the cyclical sectors --BFSI, oil and gas, and metals -- again dominated the earnings in the third quarter.
These three cyclical sectors together accounted for nearly 60 per cent of the combined earnings of the sample, down from their all-time high share of 62 per cent in Q2FY22 but much higher than their 45 per cent share prior in the pre-pandemic period.
While metals and oil and gas companies gained from higher product prices, commercial banks, which dominate the BFSI space, benefited from the decline in interest costs and lower provisioning for bad loans.
Banks’ interest costs declined for the sixth consecutive quarter in Q3FY22, allowing them to report a 60 per cent y-o-y jump in net profit.
In contrast, their operating profits were up 11.1 per cent y-o-y in the third quarter while gross interest income was up just 3.5 per cent y-o-y during the quarter. It was same for non-bank lenders such as Housing Development Finance Corporation and Bajaj Finance but they reported a more modest 29.8 per cent y-o-y growth in combined net profit in Q3FY22 and a y-o-y decline in gross interest income in the third quarter.
The combined earnings of oil and gas companies, including Reliance Industries, ONGC, and Indian Oil, were up 58.4 cent y-o-y in Q3FY22 while metal and mining companies reported a 59 per cent y-o-y rise in their combined net profits in the third quarter.
In comparison, earnings growth seems to have halted in the non-cyclical sectors due to a combination of sub-par top line growth and decline in margins. The combined net profits of non-cyclical companies (ex-BFSI, oil and gas, and metals) were up just 1.8 per cent y-o-y in Q3FY22, growing at the slowest pace in the last six quarters.
A poor showing by non-cyclical sectors could hurt the corporate earnings in FY22.
