Financials, oil and gas expected to drive profit growth in March quarter

NEW DELHI : The January-March quarter could be difficult for India Inc, as the Russian-Ukrainian crisis remains unresolved. Rising oil and gas and other commodity prices could create strong headwinds for manufacturers’ margins in most sectors, despite improved demand in the quarter, helped by the opening of the economy following the disruption caused by the Omicron variant of the coronavirus.

Among the sectors, Financials, Technology and Oil & Gas should do well. However, other sectors could see their profits impacted by headwinds on costs.

Kotak Institutional Equities expects Q4FY22 coverage universe net income to grow 27% year-on-year (year-on-year) and 16% sequentially, driven primarily by strong earnings growth at banks, oil and gas and consumable fuels. However, excluding these sectors, he expects the net profit of his coverage universe to grow at a much slower pace of 9% year-on-year.

Motilal Oswal Financial Services Ltd (MOFSL) Earnings Snapshot echoes these views. MOFSL expects oil and gas, financial services and technology to contribute 88% of incremental earnings in Q4FY22. Excluding financials, he expects Q4FY22 earnings for companies in his coverage universe to post a modest 10% year-over-year growth.

Banks should fare well, helped by a strong improvement in net interest income (NII), while good asset quality, low provisions and better performance by big banks will boost overall performance. In financials, NII growth is expected to be strongest in the past eight quarters as credit drawdown resumed during the holiday season, analysts at Yes Securities Ltd. said.

Rising crude oil prices are expected to boost realization for upstream oil and gas companies as improved marketing, refining margins and inventory gains will benefit downstream companies.

Banks and financial institutions are likely to bias performance on an aggregate basis, said Aishvarya Dadheech, fund manager, Ambit Asset Management. He also expects autos, consumer staples, pharmaceuticals, chemicals and construction materials to lag behind. These sectors will be negatively impacted by commodity inflation, he said. Consumer staples and autos will be doubly hit by slowing (rural) growth and rising commodity prices, Dadheech said. Even metals and mining will see a deterioration in their operational performance, he said.

Kotak Institutional Equities expects negative single-digit year-over-year net profit growth for the automotive, building materials, consumer staples, pharmaceuticals, metals and mining sectors. While metallurgical companies may benefit from higher steel and base metal prices, steel and aluminum producers dependent on external supply of key inputs will see an impact on costs and margins, limiting earnings growth.

Automakers, meanwhile, are expected to be hit due to pressure on production caused by chip shortages, rising raw material costs and rising cost of ownership. A weak demand environment and higher fuel, electricity and logistics costs could impact the construction sector. Pharmaceutical companies may feel the pinch of key ingredient cost inflation and higher general selling and administrative costs.

The impact of higher commodity prices on earnings in the market and the broader economy is likely to be greater than that of Nifty companies, as representation of those sectors in the index is marginal, the report said. MOFSL. BFSI, IT, Utilities and Telecom remained largely untouched by input cost pressure. Strong demand visibility in IT, recovering credit growth and normalizing asset quality should support Nifty’s earnings, MOFSL added.

On the revenue side, sales of companies covered by the MOFSL are expected to increase 32% year-on-year, driven by higher commodity and energy prices.

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