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Understanding Q3FY22 Results - Earnings growth narrows

After a broad-based earnings bounce back in FY21, growth narrowed sharply in FY22. 

Key highlights: 

1. Top line recovery is moderate at 12% YoY and is largely led by prices, while volumes have been weak. 

2. Margin pressure due to higher input prices. Resulting in corporates pruning fixed costs again – wage bill growth for BSE500 (ex IT) has slowed to 7% YoY – pre-COVID low. 

3.Banking sector’s asset quality continues to improve as MSMEs bounce back; although not out of the woods yet. 

Way forward: 

Going ahead, there are risks arising out of earnings downgrades (after upgrades in the last two years) as earnings become increasingly demand dependent (as opposed to being cost and price dependent until now) – which is weak and outlook uncertain. This, along with high valuations, and tightening global liquidity warrants a decisive pivot towards low beta (risk) 


Q3FY22 earnings: Demand revival slow, margin pressures high

Revenue: Topline increased 26%YoY (Q2FY22: 32% YoY). This is mainly aided by commodities. Excluding it, the revival remains weak at 12% YoY (Q2FY22: 16% YoY) with domestic sectors more subdued.

Profit: The skew in profits is even higher. While coverage universe posted strong 21% YoY growth, it's heavily concentrated in commodities and banks. Excluding them, it has slipped into contraction.


Sectoral trends: In retrospect and prospects

Domestic consumption: EBITDA saw a sharp and broad-based moderation. The tide has turned quite adverse for durables (ex-autos), which saw large margin pressures and moderating volume growth, domestic autos remains weak but consumer services (hotels, retail) continued its recovery. Consensus is forecasting a very strong FY23, which could disappoint.

Domestic investment: In Q3FY22, cement companies posted sharp moderation in EBITDA/ton as input prices hurt. Industrial companies on the other hand reported better top line and margin performance as government capex improved.

Global exporters: IT companies reported strong top lines and deal-wins, but margins moderated. Chip shortage weighed on export auto, while pharma was a mixed bag. Chemical companies too disappointed on the margins front as they saw a moderation. Going ahead, growth momentum in IT should continue, but China slowdown could weigh on auto export and chemical companies.

Commodities: OMCs disappointed on marketing margins (inventory loss), while upstream energy companies posted strong results. Metal companies’ profits though strong YoY are now moderating. Unwinding global reflation to weigh on commodity profits.

Financials: Slippages continue to moderate and credit costs have eased. However, incrementally credit growth revival is critical to support earnings recovery as credit costs have normalized and banks are now tracking credit growth (after growing much higher in FY21).



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