Operating margin comes under pressure for India Inc
The Q2 results of 738 listed companies indicate economic recovery is continuing. But base effects are easing and profit growth is moderating. The base quarter (July-September 2020) saw activity boosted to an extent by pent–up demand, while April-June 2021 was hit by the second wave. The results are being compared sequentially (QoQ) and annually (YoY) to adjust for the effects. The turnover is up YoY and QoQ. So are profits, at net and operating levels. But profitability growth rates have fallen, and operating profit margins (OPM) have declined. Interest costs are declining, but other expenses have risen. Inflation is impacting margins. At aggregate, net sales of Rs 13.9 trillion are up 27 per cent YoY and 13.9 per cent QoQ. Operating profit (PBDIT) is up 10.9 per cent YoY and 8.9 per cent QoQ. The cost of financing is down 7 per cent YoY and 0.4 per cent QoQ, despite a higher turnover. Profit after tax (PAT) has risen 26.3 per cent YoY and 18.5 per cent QoQ.
Excluding volatile sectors like refineries, banking, and finance, net sales are up 28.5 per cent YoY and 16.5 per cent QoQ. Operating profits are up 18.9 per cent (YoY) and 10 per cent QoQ. The OPM has fallen to 22.25 per cent from 23.5 per cent in Q1, 2021-22. PAT is up 27 per cent YoY and 16.9 per cent QoQ. Interest costs have dropped 10.6 per cent YoY and 6 per cent QoQ. Power and fuel costs have soared 31.5 per cent YoY, and 10.5 per cent QoQ. It’s no surprise the power sector has seen a 219 per cent rise in QoQ profits on a 9 per cent rise in sales. Employee-related expenses are up 18.5 per cent YoY and up 4.3 per cent QoQ. The cost of finished goods is up 51.7 per cent YoY and up 23.5 per cent QoQ. Raw material costs rose 19.3 per cent QoQ and 40 per cent YoY. For 22 listed banks, net sales are up 13.6 per cent QoQ, which is a good sign of credit growth. Banks’ fee-based incomes are also up 13.4 per cent QoQ. The cost of finance is stable, and PAT is up 8.8 per cent QoQ. Sales for non-banking financial companies are also up 11.6 per cent QoQ.
There are mixed consumption signals. There’s an 18 per cent sequential rise in sales for four auto majors. Similarly, auto ancillaries have seen a 32 per cent QoQ rise in sales. The gems and jewellery segment has seen a rise of 97 per cent in QoQ sales, and 394 per cent rise in PAT. But fast-moving consumer goods sales growth was anaemic at 6 per cent QoQ with PAT growth at 3 per cent QoQ. Among export earners, the IT industry has faced margin compression, with 5 per cent growth in sales (QoQ) versus 3 per cent growth in PAT. Pharma margins have done better, with 3 per cent QoQ growth in sales, and a 20 per cent rise in PAT. The textiles turnover is up 32 per cent QoQ and PAT is up 92 per cent. There are some less encouraging signs. Cement sales have declined QoQ, though Q2 is always soft. The global metals cycle is weaker. Non-ferrous metals saw a 6 per cent fall in sales, QoQ. Steel had 17 per cent QoQ rise in sales but only 7 per cent rise in PAT. Overall, inflation looks to be a worry but economic activity continues to recover, in an uneven fashion.