India Inc profits grow in Q4 FY22, but working capital is the issue

31 May 2022 , 05:22 PM

Macro picture does look encouraging on sales

If you were to take the 2,900 companies that have announced their results till date for Q4FY22, the sample is largely representative of the picture of Indian corporates as a whole. Let us look at the top line first. Sales Revenues were up 25.8% on a yoy basis for Q4FY22 and this can be largely attributed to the price effect. With the commodity rally driving up input costs, companies with pricing power managed to pass on input cost hikes to customers. Some of the key sectors with pricing power include autos, paints, FMCG etc.

However, sales on a yoy basis, tend to obscure the short term high-frequency trend in sales revenues. Hence we also look at sales growth on a sequential basis, i.e. over the December 2021 quarter. On a QOQ basis, sales were up just about 9%, which is impressive. However, what stands out is the sharp -43% fall in other income. This can be due to lower yields on debt instruments, which might have affected treasury yields for companies.

Macro picture is mixed on profitability front

The other parameter to look at is the profits. Since input costs are the major issue in this quarter, we look at two sides of profits. We look at gross profits, which is the profit generated from the core manufacturing operation. We also look at the net profits or the bottom line for an overall picture. Let us look at gross profits first.

On a yoy basis, the gross profits were up 16.2%, while the gross profits were higher on a QOQ basis by just about 5%. However, the pressure was evident in margins. On a yoy margins, gross margins tapered from 13% to 12% while on a QOQ basis, the gross margins tapered from 12.4% to 12%. The global spike in commodity prices resulted in input cost pressures. That is evident in lower gross margins.

What about net profits. Net profits for India Inc were up 26.9% on a yoy basis and they were also up 12.1% on a QOQ basis. The surge in profits was largely driven by steel, aluminium and upstream oil; where higher commodity prices led to a flattering performance. Even if you look at net margins for Q4FY22, it is up by 10 bps at 10.55 on yoy basis and it is also up 30 bps on a QOQ basis. The pressure on gross margins were largely offset by lower interest costs and lower taxes. Interest costs fell due to lower rates and a conscious strategy among large companies to pare debt.

Sectors that flattered on top line and bottom line

Since we are looking at a sectoral trend, we have considered only standalone numbers and not consolidated numbers as it could distort the sectoral picture. There were a number of sectors that flattered on top line and bottom line.

·         Automobiles and ancillaries saw sales grow by 5.5% while profits grew by 35.4%. It was a combination of cost controls, inventory efficiency gains as well as the leverage with the companies to pass on input cost hikes via higher prices.

·         Capital Goods saw 14.1% growth in sales and 48.3% growth in net profits. This sector saw benefits of a gradual revival in the capital cycle even as operating margins on capital goods improved in the quarter.

·         Chemicals was another major sector with 38.3% growth in sales and 46% growth in net profits. Chemicals have seen much better pricing power with the supply from China continuing to face supply chain constraints. That boosted profits for these stocks.

·         Finally, media and entertainment companies saw 27% growth in sales with 92.5% growth in net profits. With normalcy returning, most of the media outlets have seen a sharp growth in subscription and ad revenues leading to better outlay absorption.

Some of the other big absolute contributors to profit growth were metals and upstream oil. However, in both cases, the profit growth did not keep pace with sales growth due to higher operating costs and higher input costs in the quarter. Banks did see improved profits, but that was more due to lower provisioning in the quarter.

Sectors that flattered on top line but faltered on bottom line

In fact, there were several sectors that did well on sales growth but the cost pressures impacted profit growth. Here is a quick take on some of them.

·         Cement was a classic example, where the top line sales were up 6.6% but the net profits fell by -20.6% yoy. That was largely due to a very sharp spike in power and fuel costs in the quarter, although the intensity of pressure from raw materials and freight abated.

·         Consumer durables was another major segment were sales were up 9.8% but net profits fell by -25.8% yoy. While input costs were material, the real pinch came from the sharp spike in logistics cost for these companies.

·         Downstream oil and gas was a key segment. Stocks in refining and marketing of oil took a hit despite better gross refining margins. The hit came from petchem margins narrowing and also from weak marketing margins on static petrol and diesel prices.

·         Finally, telecom and textiles were two more sectors that saw compression in profits despite higher sales. Both the sectors saw a spike in operating costs in the quarter and that is reflected in profit pressures.

The real story is in working capital

If one were to look at the profit statements without looking at the cash flow statement, it is likely that you would miss the most critical trend. In FY22, net cash from operations have fallen almost across Indian manufacturing companies. There have been several reasons for this trend in FY22.

For starters, trade receivables have risen amidst payment delays in the market. Secondly, small and mid-size companies are seeing lower credit via trade payables and that is putting pressure on cash from operations. Above all, most companies have locked in more of their funds in inventories, as they grapple with supply chain constraints. That is, perhaps, the real story of the fourth quarter results of Indian companies for Q4FY22.