InvestorQ : How have been the second quarter results for Q2FY23 so far and are there are some broad trends you are picking up?
Archita Jajjoo made post

How have been the second quarter results for Q2FY23 so far and are there are some broad trends you are picking up?

Niti Shenoi answered.
3 weeks ago

We are perhaps only about half way through in terms of Q2FY23 results, but most of the large industrial houses and even the banks have announced their results, so the picture is becoming increasingly clear. What are the broad drawings we get? The broad theme is that most of the profit in this quarter have emanated from the banks and financials followed by the IT companies, despite the profit pressure. If banks and IT companies are included for analysis, then profit growth is much lower than the revenue growth for the quarter. Clearly, the pressure is coming from the bottom line in Q2FY23, especially the cost pressure.

As of date, a total of over 450 non-banking companies that announced results were studied. What does it say? Revenues / sales grew at a robust 30% yoy. However, when you come down to the earnings before interest, tax, depreciation and amortization (EBITDA), it is down by -8.5% on account of the pressure exerted by higher input and manpower costs. If you go further down to the net profit, then the net profits for the sample ex-banks is down by -24% on a yoy basis. That is largely on account of the 15% spike in interest costs amidst the extreme hawkishness shown by the RBI in line with global trends.

Probably, the real story for the quarter may not be yet visible as it pertains to the working capital pressures that the companies are facing. You can understand that only if you look at the cash flow statement and focus on the net operating cash flows. Due to high-cost inventories that companies are carrying and due to the spike in trade receivables amidst balance sheet stress, there is a sharp spike in the capital locked into working capital cycle. That is a cost that will gradually manifest in the next few quarters only. These should get mitigated once commodity prices taper, but that is more in the realm of hope for now.

It looks like a diverse story among Indian corporates with some feeling a lot of stress and others doing exceptionally well. Banks and IT companies have reported strong earnings growth, although the pressure on OPMs of IT stocks is quite apparent. However, the real pressure comes from sectors like metals, cement and several industrials. Sample these. Coking coal prices have been a huge drag on steel companies while power and fuel costs are massive drag on the cement companies. Both these sectors either dipped into losses in the quarter or saw their profits drop sharply. But there are other problems too.

For instance, FMCG and autos have taken a hit on weak rural demand and the rural preference for unbranded and small lot size purchases. Agriculture stocks are the pressure point due to a weak Kharif, although the bet is on a much stronger Rabi. The stand out performer in the quarter are the banks. Most banks, especially PSU banks have gained immensely from rising rates, which pushed the yields on loans and investments smartly. While NIIs and NIMs have shot up for the banks, the stress in the form of provisions and the gross NPA levels are also sharply down. Perhaps, banks have saved the quarter.