Cost pressure

Higher cost can affect margins of listed firms

The performance of listed companies in the January-March 2022 quarter (Q4) suggests that economic recovery continues in an uneven way, but expenses have started mounting in worrying fashion. A sample of 604 companies with minimum revenues of Rs 10 crore have so far declared results. If we remove volatile sectors such as oil and gas, banks, and other financial service providers from this sample, aggregated operational income has grown 18.7 per cent over the corresponding quarter of fiscal 2020-21. In sequential terms, revenues have grown 9 per cent. Profit margins are good. Operating profits have grown 24.5 per cent, year-on-year (YoY), and profits after tax, or PAT (adjusted for extraordinary items), are up 19 per cent. However, power and fuel costs jumped 31 per cent, while raw material costs are up 20 per cent. Bank credit has grown 9 per cent, which is on the lower side but an improvement.

This performance is commendable, given the tectonic shift in the global economy since the start of the Ukraine war. Energy prices have spiked and there’s been monetary tightening across the globe. Many manufacturers are struggling to reorganise supply chains, as the Ukraine war and associated sanctions on Russia affect metals, agro-businesses, and semiconductors. China going into lockdown has added to the supply-chain issues. All these adverse factors may be a drag on future performance. Economic activity is apparently being led by public spending, and by faster recovery in higher-income segments. The infrastructure and construction sectors have seen recoveries after a weak Q3. Cement has also seen price and volume recovery as construction activity has picked up. Steel continues to deliver good results on strong demand and lower China production. But there’s been a slowdown in non-ferrous metals, and in the profitability of the mining sector.

On the export front, IT and textiles have done reasonably well as the rupee has weakened. But pharmaceuticals have lost steam and continue to face supply-chain issues. Rural demand and low-income demand (the two strongly overlap) seem weak. There is a recovery in the auto ancillaries segment. But in automobiles, the picture is complicated. The three leading two-wheeler manufacturers have all done badly. But Maruti has improved revenues and it holds over a 50 per cent market share in the passenger car segment. Tata Motors has reduced losses. The poor two-wheeler performance is linked to weaker rural activity, and so is slow growth in the fast-moving consumer goods sector. The latter has seen marginal revenue growth and profitability is down sequentially. Apart from weaker demand, the Indonesian palm oil export ban is hurting. Guidance across most sectors is noticeably cautious. The IT sector, for example, is worried about margin pressure and possible easing in North American demand as monetary conditions tighten. Other export-oriented industries have pointed to a big drop in the yuan as a threat to competitiveness.

Looking forward, extraordinary PAT gains are less likely, given the higher base. Inflation across the board could be compounded by the need to increase employee compensation — expenses on employees increased 17 per cent YoY in the quarter. While the focus of public spending on infrastructure has helped keep things ticking over, there is an urgent need for an acceleration of private consumption demand, especially in the lower-income segments and by extension in the semi-rural economy. Bank credit expansion must also climb several rungs to sustain demand.