Early bird Q2 numbers off to promising start

The early bird sample has 10 companies that are part of the Nifty50 index. The combined net profit of these index companies was up 16.5 per cent YoY during the quarter.

However, besides the companies mentioned above, the environment for manufacturers and domestic market-focused companies appears challenging from the numbers.

For example, the combined net profit of companies (ex-RIL, financials, and IT exporters) was up just 3 per cent YoY during the quarter, despite a healthy 17.6 per cent YoY growth in their net sales during the quarter. Analysts attribute the margin squeeze due to a steady rise in commodity and energy prices in the last 12 months.

“Most sectors are likely to face margin pressure due to a combination of rising input costs and sharp depreciation in the rupee against major currencies,” says Dhananjay Sinha, head of research, Emkay Global Financial Services.

Companies in sectors such as automobiles, cement, telecom, and building materials are likely to be the worst affected. This explains why two-wheeler maker Hero MotoCorp and UltraTech Cement reported a decline in net profit during the quarter.

The core operating margins for domestic manufacturers (ex-RIL, financials, and IT services) was down 123 basis points on a YoY basis to 16 per cent (of net sales) in Q2 of the current fiscal year as companies’ expenditure on raw materials, power, and fuel outpaced their net sales growth.

The results also show the impact of recent spike in bond yields and interest rates as interest cost grew faster than revenues and operating profit across sectors.

For the entire sample, interest costs were up 31.1 per cent YoY during the quarter, against 19 per cent growth in operating profit, resulting in a decline in companies’ interest coverage ratio during the quarter.

Interest cost for domestic manufacturers was up 25 per cent YoY during the quarter, outpacing operating profit (up 5.2 per cent) growth by a wide margin.