NEW DELHI : Earnings growth for India’s largest companies is set to slow in the June quarter as they grapple with inflationary pressures, currency depreciation and rising interest rates.
While revenue growth will be helped by last year’s weak base and price increases to offset increases in input costs, earnings before interest, taxes, depreciation and amortization (EBITDA) are expected to fall 32% from compared to the previous year, according to an analysis by Mint. However, aggregate data for 47 members of the Nifty Index indicates that sales are expected to increase by 35%.
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Indian businesses face multiple challenges, from currency depreciation and rising interest rates to soaring input costs. High energy and raw material costs and a weaker rupee are forcing businesses to raise prices, prompting consumers to cut spending. With inflation showing few signs of easing, the central bank will likely raise interest rates further, shaking consumer confidence and demand for goods.
While the manufacturing sector is expected to see the biggest squeeze on margins due to a surge in raw material and energy prices, the information technology (IT) industry could also feel the heat, according to experts. analysts. High employee turnover, rising labor costs, and rising travel and administrative expenses remain the top sources of pressure for software services companies. Although the depreciation of the rupee is likely to help IT companies, the benefits could be offset by the dollar’s gain against other currencies, including the euro. A stronger dollar could also support pharmaceutical exports, but pressure on input costs and competition in the United States should offset the gains.
“Most sectors will be grappling with rising commodity prices alongside the depreciation of the rupee. Electronics, chemicals, durable goods and metals are among the sectors struggling with rising inflation and currency depreciation,” said Aishwarya Dadheech, fund manager at Ambit Asset Management.
Inflationary pressure is likely to impact manufacturing companies’ margins and profitability, even though revenue growth is expected to be strong, said Mitul Shah, head of research at Reliance Securities.
The banking and financial services sector should continue to support earnings growth. Motilal Oswal Financial Services analysts expect banking firms to post 26% profit growth in the June quarter as an increase in the use of credit boosts net interest income (NII) . However, rising G-Sec yields are expected to put pressure on Treasury revenues. Yes Securities analysts expect lower provisioning and a higher NII to boost banks’ profits by 29% from a year ago. Non-bank financial companies and smaller financial banks could also experience a strong rebound in profits.
Automakers are also expected to report a recovery in profits from a weak base after three quarters of declining operating margins due to supply disruptions.
Profits in the oil and gas sector will be mixed, with higher crude prices and strong refining margins boosting profits for oil producers, even as state-run fuel retailers bear the impact of the sale fuel below cost. Hospitality, retail and theater chains will likely benefit from the full opening of the economy as the pandemic subsides.
Analysts expect the outlook for corporate earnings to come under pressure in the current fiscal year. The FY23 earnings outlook may need to be revised down due to macroeconomic challenges, said Deepak Jasani, head of retail research at HDFC Securities. The exceptional tax on oil companies will also lead to downgrades. “We believe earnings growth for oil and gas companies will be severely impacted,” Dadheech said. He added that cash losses could contribute to some extent to the deterioration in bank profits.
Shah said he expects earnings deterioration to continue due to cost inflation and weak demand. Companies with high imports will see greater reductions, given the weakening of the rupee. The manufacturing sector would also experience higher margin contraction due to raw material cost inflation, although it has eased somewhat, Shah added.
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