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    Bottomline: Inflation is denting corporate profitability

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    Bottomline: Inflation is denting corporate profitability


    Early bird numbers indicate global dislocations and inflation are impacting profitability, and it may be a while before this ease

    The earnings season has kicked off with a mixed bag of numbers, some businesses doing exceptionally well, while others seeing a big dent in margins. To get a broader sense of how things have been though, it helps to look at numbers collectively. And that's just what we did for the 64 companies in the BSE-500 index that have reported numbers so far.
    Here's what we glean from the early birds.
    The disruption effect
    The first quarter of fiscal 2022-23 is unique in several aspects. For one, it comes on a low, Covid-impacted base of the previous period ended June 2021. And that is showing up in several performances, especially of retail-facing businesses, which tend to skew the results. To give you a sense, on an aggregate basis, revenues for the 64 companies are up 37 percent year-on-year (YoY) and 1.45 percent quarter-on-quarter (QoQ), but if you look at the average growth rates of companies, this jumps to 73 percent YoY and 2.35 percent QoQ. This is because, companies like PVR, Avenue Supermarts, and Delta Corp have grown over very small bases in the previous corresponding quarter.
    But the cash profits or PBDT (Profit Before Depreciation and Tax) is where things start to get interesting. While on an aggregate level, cash profits are up 20 percent YoY and 5.4 percent QoQ, on an average basis it is up just 8.2 percent YoY and 6.2 percent QoQ. What this indicates is that the heavy weighted (larger companies) are skewing the picture with their better performances. Reliance Industries' strong quarter is one big reason for this, along with several other Covid-recovery candidates. But when it comes to averages, tepid cash profit growth for many of the IT services companies and some like Havells that haven't performed well this quarter is causing a strain. But even on an aggregate basis, the cash profit margins are lower by 250 basis points YoY.
    When it comes to profit before tax, the picture is a little better with growth in aggregate up 25 percent YoY and 4.6 percent QoQ, while on average it is up 66 percent YoY but lower by 1 percent QoQ. The higher average growth is powered by several players like Jindal Steel & Power, Oberoi Realty, Avenue Supermarts, Bharat Electronics, and Indusind Bank which saw good profit growth.
    The bigger message
    A fair bit of the growth seen in the June quarter has been on the back of the resumption of normal activity after Covid impacted periods, and some of this may also be driven by an element of pent-up demand. But that may already be starting to wane. Companies like Hindustan Unilever, which managed a robust performance thanks to its relatively inflation-insulated premium segment, have cautioned about consumption being impacted by inflation. And while many are hopeful of a recovery in the second half of the year, there are several global imponderables—the possibility of a recession, geopolitics and its impact on fossil fuel prices, central bank actions and what they spell for liquidity flows and exchange rates, China's resumption of economic activity and its impact on global commodities and demand-supply equations—that are likely to keep the outlook clouded with uncertainty and impinge on business and consumer sentiment and growth.
    With several moving parts, making forecasts on oil prices and inflation is near impossible. And while the Reserve Bank of India is hopeful of inflation easing going forward. The jury is still out on where oil prices and the rupee are headed. Given this, to think the next quarter or the one after will reveal an improvement in margins may be hopeful at best, and till things turn on operating performance investors will likely remain very selective in stock picking.
    So, don't let this quarter's performance on the headline numbers draw you in. Study your companies carefully for the likely impact of extended uncertainties before you think of investing.
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