August 2022: Corporate profit growth slows in the June 2022 quarter
In 2022
- December 2022: 2022 – a year of outperformance by Indian markets
- November 2022: Tracking recent Indian IPOs
- October 2022: AMCs – Growth at a reasonable price
- September 2022: Dollar surges as the US Fed raises interest rates
- August 2022: Corporate profit growth slows in the June 2022 quarter
- July 2022: Valuations at point of entry determine subsequent returns
- June 2022: Commodities cool off
- May 2022: Inflation – a headwind for corporate profits and markets
- April 2022: HDFC Bank and HDFC Limited Merger
- March 2022: CRB Commodity Index at a multi decade high
- February 2022: Two tiered market
- January 2022: Inflation spooks “growth” stocks
The June 2022 quarter results are out and we thought we will review them to gauge the health of the broad corporate sector. We looked at the non-financials in the BSE500, all but 2 of whom have reported results for the June 2022 quarter. The material sector has reported very good growth in earnings because of high international commodity prices – so we looked at the data in aggregate and also looked at the data by excluding the material sector. The tables below summarize the data – we have used 3-year CAGR to eliminate the impact of covid.
| BSE500 (Ex-Financials) | Sep-21 | Dec-21 | Mar-22 | Jun-22 |
|---|---|---|---|---|
| Revenue (Rs cr) | 20,96,165 | 23,43,635 | 25,57,167 | 26,69,986 |
| 3 Year Revenue CAGR | 6.6% | 9.2% | 12.2% | 15.3% |
| EBIT (RS cr) | 2,55,925 | 2,75,077 | 3,03,696 | 2,53,824 |
| 3 Year EBIT CAGR | 11.9% | 15.8% | 14.1% | 11.0% |
| EBIT Margin | 12.2% | 11.7% | 11.9% | 9.5% |
| BSE500 (Ex-Financials, Ex-Material) | Sep-21 | Dec-21 | Mar-22 | Jun-22 |
|---|---|---|---|---|
| 3 Year Revenue CAGR | 5.5% | 8.2% | 11.2% | 14.5% |
| 3 Year EBIT CAGR | 7.9% | 13.3% | 10.5% | 6.2% |
| EBIT Margin | 10.7% | 10.6% | 10.7% | 8.3% |
While revenue growth remains strong and has been showing an upward trend over the last few quarters, EBIT growth which was showing a healthy uptrend till March 2022, has declined to 11.0% in the June quarter. If we exclude the Material sector from the calculations, revenue growth remains strong, but EBIT is growing at a 3-year CAGR of only 6.2%. It looks like high commodity prices and inflation are having an impact on the EBIT growth, possibly because businesses are yet to pass on the input cost pressure to customers. EBIT growth peaked in Dec-21 and has been on a slight declining trend both for the aggregate data and for the data, ex-Material. EBIT margins too have declined significantly in the June 2022 quarter.
August 2022 was a good month for Indian equities and the Nifty was up 3.5% for the month. One of the reasons for the large up-move in stocks globally over the last two and a half months has been the cool off in commodities and a downtick in recorded inflation, something we spoke about in our June newsletter. The Nifty has rallied 17% from its low made roughly two and a half months ago and is now 4.5% away from an All-time high.
One of the reasons that the market rallied was that the Fed was expected to pivot, to easing off on interest rate increases as inflation cools down. However, at the Jackson Hole Symposium, Jerome Powell, the head of the US Fed, signaled that the US Fed remains very concerned about inflation and more importantly, inflationary expectations (which can spiral as seen in the past) and is likely to continue to raise interest rates to tame inflation. It should also be noted that the rally in stocks was in response to the US inflation falling from 9.1% to
8.5% but this is a long way away from the US Fed target of 2% inflation. The US Fed seems determined to bring inflation down to 2% and the language of Jerome Powell at Jackson Hole suggests that high inflationary expectations are a greater risk than a potential recession considering that the jobs market remains strong so far. The Quantitative Tightening of the US Fed is also expected to double starting 1st September, 2022.
As such, we expect a volatile period for markets going forward. That said, we as a principle, do not try to predict economic events because it is really so hard to do – there are so many moving parts and anything can switch at any point in time and make your economic analysis worthless. We remain focused on searching for high quality companies trading at reasonable valuations and keep a long -term view to ride out economic events. We must admit though that at a recent review we found that there are very few additional opportunities in our high-quality universe which offer a good reward to risk ratio. Valuations of high-quality companies are elevated and investors would be well advised to keep this in mind.