Q1FY23 results are done; mere paas optimism hai

The first quarter results for FY23 are done and it has left us with a “feel good” factor. Yes, sales are only marginally up on a sequential basis and profits are down on a sequential basis. But this quarter has borne the brunt of high inflation, spike in input costs and recessionary fears. The results for Q1FY23 need to be looked at in context. With over 3,600 companies already announcing results, we have a fairly good macro picture. Shorn of all the rhetoric, the one word to describe the quarter is “optimism”. We will come back to that later.

Overall picture for Q1FY23: Top Line and Bottom Life

Here are some key macro level takeaways on the  Q1FY23 results announced. 

    a) On a yoy basis, sales revenues were up 41%, driven largely by price hikes than by volumes. Amidst robust demand, higher input costs were easily passed on. Sectors like automobiles, chemicals, paints and FMCG products were examples of pricing power.

    b) Here is a quick look at sales on a sequential basis over the March quarter to capture short term momentum. QOQ sales were up just about 4.2%. However, this was a quarter when recessional fears were at a peak globally.

    c) For a core business picture, let us look at gross profits. On a yoy basis, gross profits were up 14.1% but it was down -7.6% on a QOQ basis. The gross margins fell to 7.7% in Q1FY23 compared to 12.2% in June 2021 quarter and 11.2% in March 2022 quarter.

    d) Finally, for the bottom line picture, let us look at the net profits. On a yoy basis, net profits were up 22% but it was down -20.3% on a QOQ basis. However, there is an important to remember. The fall in the profits in the latest quarter is largely on account of the loss of Rs19,000 crore reported by the 3 downstream oil companies (IOC, BPCL and HPCL) as they were forced to sell below landed cost. Things should look more rational in the coming quarter. 

Some sectors did good but some were not so good

There were two classes of sectors from an analytical perspective. The first category are the ones that saw robust growth in sales and in profits. They were the stars. Then there were sectors where sales growth was robust, but profit growth was tepid or even negative. Let us look at the sectors that were the stars on both counts; in terms of the top line growth and also in terms of the bottom line growth.

Needless to say the big star was the auto sector with sales growth of 45.3% and profit growth of 96.1% yoy. Autos got the help of cost controls, inventory tweaks and better chip supplies. Capital goods also gained from a revival in the capital cycle and overflowing order books. The capital goods sector saw 44.9% growth in sales and 351.2% growth in net profits. Chemicals had the advantage of better pricing power and gains from the reduced supply from China. Chemicals saw 52% growth in sales and 54.5% growth in net profits. Finally, banks were the joker in the pack with 10% revenue growth and 36.9% profit growth. For banks, it was a mix of lower provisioning, lower gross NPAs and better NIMs.

Let us turn to the sectors where the revenues were good but profit growth faltered. In all the cases the challenge was higher input costs. In the case of cement sector, due to higher freight and fuel costs, the sales were up 28.2% but net profits fell by -18.3% yoy. Easing metal prices resulted in metals seeing sales growing by 31.7% on a yoy basis but net profits contracting -19.6%. We have already discussed about downstream oil, so we will not go into details again. The other sectors to see profits falter despite higher sales are telecom and textiles. 

Mere Paas optimism Hai

One of the screamingly positive themes that emerge from the Q1FY23 results is the sheer optimism that the worst is over. In the March 2022 quarter, the pressure on the numbers came from working capital tightness. That has been largely addressed in the June quarter, although the pressure points do remain. Q1FY23 still shows some margin pressures but the positive triggers far outweigh the headwinds. Here is why.

The levels of inflation appear to have peaked, and that is likely to make central banks less hawkish. The rupee may have topped out around 80/$ and hence the FPI selling may have bottomed. As order flows resume in next few weeks, sales and profit momentum could get a boost. The reason for optimism is that after 3 consecutive quarters of margin pressures, Q1FY23 has shown some optimism. The optimism is that the worst for the earnings cycle may be over or about to get over. It is this optimism that will really count.