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Muted demand, high costs likely to weigh on corporate profits in FY22

While earnings for FY22 will benefit from the low base of FY21, just as the FY21 numbers have benefitted from the low base of FY20, there are a couple of headwinds.

By: ENS Economic Bureau | New Delhi |
February 22, 2021 3:19:59 am
The muted sales of two-wheelers are evidence they have become unaffordable for many. (Express file)

The reasonably good results for the December 2020 earnings season and the recovery in the coming quarters notwithstanding, profit estimates for FY22 remain below pre-Covid levels. Indeed, while the economy is recovering fast, large pockets remain fragile.

While earnings for FY22 will benefit from the low base of FY21, just as the FY21 numbers have benefitted from the low base of FY20, there are a couple of headwinds. The first is the rising prices of commodities, especially crude oil, and it is not certain all businesses will be able to pass on the higher input costs. The muted sales of two-wheelers are evidence they have become unaffordable for many after the price hikes.

The second concern is that the demand for a host of consumer goods could peter out once the demand from the more affluent households has been satiated; analysts point out the lockdowns necessitated purchases of homes and also a range of goods. While the sales of affordable homes could well retain momentum, whether this holds for more expensive residential properties remains to be seen.

Large numbers of urban households — and thousands of small enterprises — have been badly impacted by the Covid-19 pandemic and that this would affect consumption, at least in the near term.

Again, profitability has been boosted by hefty cut costs and not all of it would be a permanent saving. For instance, salaries would be restored and increments re-started as the business picks up. However, apart from IT and BFSI companies, wage bills are flat or shrinking.

Explained

Large cos gain mkt share

The corporate results reflect that the larger companies have made strong comeback, partly on the back of market share gains from the unorganised sector. This is reflected in the robust GST collections over the past few months.

The corporate results suggest the larger companies, especially market leaders and bigger brands, have made strong comeback, partly on the back of market share gains from the unorganised sector. This is reflected in the robust goods and services tax collections over the past few months.

But the anaemic credit growth — with loan growth slipping to sub-6 per cent in the fortnight to January 29 and commercial paper issuances in January down 26 per cent lower y-o-y — is a sign a large swathe of companies is not stepping up production. Kotak Institutional expects net profits of the Nifty50 Index to grow 20 per cent in FY21 and 25 per cent in FY22.

The increase would be led by volume recoveries in the auto and oil & gas sectors, lower provisions in banks and higher ARPUs in telecom. Given the elevated valuations, strategists expect the markets confidence about the country’s medium-term growth prospects would be crucial.

“We note that India’s GDP growth had started to decelerate meaningfully even before the Covid-19 pandemic outbreak on decline in the investment component of GDP,” they observed. —FE

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