High costs to limit profit growth in Q2

NEW DELHI : India Inc.’s September quarter performance is expected to be boosted by the domestic economic recovery, while global volatility keeps performance muted for export-oriented sectors.

Mint’s calculations based on consensus earnings estimates from Bloomberg showed that 41 of Nifty’s 50 companies (excluding financials) could post average revenue growth of 18.6% year-over-year. However, the cost pressure, although it may peak, could weigh on operating performance and earnings growth. Consensus earnings before interest, taxes, depreciation and amortization in the September quarter (Q2) could decline 9.3% year-on-year and 14.5% sequentially.

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Subducted phase

“The second quarter will mark five consecutive quarters of operating margin contraction on a year-over-year basis for our coverage universe, excluding financial and oil marketing companies. However, margins are expected to increase sequentially, indicating signs of dips in Ebitda margins,” analysts at Yes Securities Ltd. Ebitda means earnings before interest, taxes, depreciation and amortization.

Even as crude oil and commodities fell from June highs, high-cost commodity inventories could continue to hurt businesses before easing in the third quarter.

Analysts at Elara Securities (India) Pvt. Ltd said: “Due to continued pressure on margins, Nifty’s ex-financial Ebitda and overall net profit are expected to remain stable year-over-year.”

Revenue growth in Q2 could be driven by domestically focused consumer sectors and games, led by financials and supported by consumer discretionary. Pent-up demand and stockpiling ahead of the holiday season could help autos and consumer durables.

According to analysts at Motilal Oswal Financial Services Ltd (MOFSL), sectors focused on consumption and domestic investments could outperform those dependent on global demand/cyclicals/commodities.

Sectors such as metals, oil and gas, which led growth in previous quarters, are expected to lag behind. The observed slowdown in demand and prices for base metals and steel, as well as steel export duties, are expected to impact metals businesses, while rising coal costs further limit profits. In addition, the windfall tax, declining refining margins, inventory losses and rising natural gas prices are major headwinds for oil and gas producers, traders and distributors.

“We expect net income from autos (helped by improved chip availability), banks (strong loan growth, expanding net interest margins and sharply lower loan loss provisions) and diversified financial services (loan growth acceleration) is up sharply year-over-year,” Kotak Institutional Equities analysts said. They expect net income from building materials due to high fuel and power costs, metals and mining due to lower commodity prices, weak realization and oil, gas and consumable fuels (low refining margins and large inventory and marketing losses in the case of downstream oil companies), to decline sharply both on a sequential and annual basis. foreign currency revenue growth and margin headwinds will be the primary influencers.

“Nifty 50 earnings growth is expected to be moderate to mid-single digit in the second quarter, primarily due to margin compression in cyclical sectors and also due to the high base effect in the second quarter of the last year,” said Sushant Bhansali, chief executive of Ambit. Asset Management.

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