NEW DELHI : The earnings growth of India’s largest companies is poised to slow in the June quarter as they grapple with inflationary pressures, currency depreciation and rising interest rates.
While revenue growth will be aided by last year’s low base and price hikes to offset input cost increases, earnings before interest, taxes, depreciation and amortization (Ebitda) is likely to decline 32% from a year earlier, a Mint analysis showed. However, the aggregated data for 47 members of the Nifty index indicate that sales are expected to grow 35%.
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Indian companies are facing multiple challenges, from currency depreciation and rising interest rates to soaring input costs. High energy and raw material costs and a weakening rupee are forcing companies to raise prices, prompting consumers to cut spending. With inflation showing little sign of easing, the central bank will likely raise interest rates further, denting consumer sentiment and demand for goods.
While the manufacturing sector is expected to report the sharpest margin squeeze because of a spike in commodity and energy prices, the information technology (IT) industry may also feel the heat, analysts said. High employee turnover, rising salary costs, and increased travel and administrative expenses remain key pressure areas for software services companies. Although the rupee depreciation is likely to aid IT firms, the benefits may be negated by the dollar’s gain against other currencies, including the euro. The stronger dollar may also favour pharma exports, but the pressure on input costs, and competition in the US, are expected to offset the gains.
“Most sectors will struggle with the rise in raw material prices, alongside the depreciating rupee. Electronics, chemicals, durables, and metals are some of the sectors grappling with rising inflation and depreciating currency,” said Aishwarya Dadheech, fund manager at Ambit Asset Management.
Inflationary pressure is likely to impact margins and profitability of manufacturing companies, although revenue growth is expected to be strong, said Mitul Shah, head of research at Reliance Securities.
The banking and financial services industry is likely to continue supporting earnings growth. Analysts at Motilal Oswal Financial Services expect banking companies to deliver 26% profit growth in the June quarter as higher credit uptake boosts net interest income (NII). However, rising G-Sec yields are likely to put pressure on treasury income. Analysts at Yes Securities expect lower provisioning and higher NII to boost bank profits by 29% from a year ago. Non-banking financial companies and small finance banks may also see a strong earnings rebound.
Automobile companies are also expected to report an earnings recovery on a low base after three quarters of decline in operating margins because of supply disruptions.
Earnings of the oil and gas sector will be mixed, with higher crude prices and strong refining margins lifting profits of oil producers, even as state-run fuel retailers bear the impact of selling fuel below costs. Hospitality, retail, and theatre chains are likely to benefit from the economy opening up fully as the pandemic eased.
Analysts expect the earnings outlook of companies to face pressure in the current fiscal. The earnings outlook for FY23 may have to be revised lower because of macro challenges, said Deepak Jasani, head of retail research at HDFC Securities. The windfall tax on oil companies will also lead to downgrades. “We believe earnings growth of oil and gas companies will be severely impacted,” Dadheech said. He added that treasury losses may contribute to earnings downgrade of banks to some extent.
Shah said that he expects earnings downgrade to continue because of cost inflation and demand weakness. Companies with high imports will see higher cuts, given the weakening rupee. The manufacturing sector would also witness higher-margin contraction due to commodity cost inflation, though it has softened somewhat, Shah added.
