Consumption remains weak

Higher inflation is affecting operating margins

An analysis of the September-December 2021 quarter results of 2,986 listed companies shows inflation is biting. Expenses are up, margins have compressed, and private consumption is weak. The base effect is also wearing off, since Q3 2020-21 was very profitable. On the positive side, commodity sectors like oil and gas producers, miners, chemicals, and industrial metals have done well. There are some signs of recovery in activity. The aviation sector has made a comeback, logistics and shipping have grown, and hospitality is reviving. Overall, the sample declared net sales of Rs 32 trillion, a rise of 24 per cent year-on-year (YoY), with operating profits (PBDIT) up 12.5 per cent at Rs 7.96 trillion, and profit after tax (PAT) up 33 per cent at Rs 2.77 trillion. A double-digit rise in the wholesale price index is reflected in costs. Energy costs rose 40 per cent, while other raw material and finished goods costs were both up 40 per cent.
 

Excluding volatile sectors, like oil, gas, and refining; and banking and non-banking financial companies (NBFCs), sales rose 22 per cent, while operating profits rose 6.9 per cent. Operating margins, however, dipped to 19 per cent from 21.8 per cent a year ago, and the net margin dropped to 8 per cent from 8.5 per cent. Oil and gas production had a bumper quarter with sales up 43 per cent and PAT more than doubling (up 226 per cent). Gas distribution has also done well with a 67 per cent rise in sales and 43 per cent rise in PAT. But banking credit expanded by barely 3.5 per cent, and NBFC credit was flat. Private consumption was poor. The fast-moving consumer goods (FMCG) sector has a flat trend in PAT and operating profits. Automobile manufacturers saw a sales contraction and a 19 per cent drop in operating profits, translating into a 54 per cent drop in PAT. Two-wheeler majors, Bajaj and Hero, had big sales drops. So did Maruti Suzuki and Tata Motors. The industry is still suffering chip shortages. The auto ancillary segment has a 39 per cent drop in PAT. Public expenditure shows up in cement offtake and infrastructure development. Both sectors had lacklustre single-digit sales expansions, and PAT in cement slid by a third (32 per cent) due to high expenses.

In the information technology sector, 137 firms that have declared results have a 21.5 per cent rise in net sales (constant dollar), 9.5 per cent rise in operating profits, and 8.6 per cent rise in PAT. Expenses are up 25.5 per cent and the operating margin has dropped to 25 per cent from 27.9 per cent a year ago. Industry body Nasscom expects strong deal wins in 2022-23 but flags margin compression and high employee churns as areas of concern. Another exporter sector, pharmaceuticals, managed single-digit sales growth and PAT expansion in the face of higher costs of raw material and freight. Non-ferrous metals and iron and steel saw a bull run, with global demand driving prices higher. The steel industry saw a 60 per cent rise in PAT on a 43 per cent rise in sales. The non-ferrous metals sector saw 70 per cent rise in PAT on 44 per cent rise in sales. Overall, high inflation and low employment are contributing to weak consumption, and lack of credit expansion is another area of concern. The broad economic recovery continues but the pace may have slowed in Q3, rather than accelerated.