Q4 flatters on sales, shocks on operating profits

Operating profit growth dropped in Q4

by 5paisa Research Team Last Updated: Jun 24, 2022, 03:27 PM IST

A quick glance at the fourth quarter results would have been enough to tell you that operating profits were under pressure. The reasons are not far to seek. The commodity inflation has made most inputs steeper. In addition, the price of fuel, power and coal have gone up and that is really constraining the operations of most companies.

To add to it, the supply chain constraints are also adding to the pressure. Now the latest risk is in the form of rising interest rates and higher funding costs. No doubt, OPMs are under pressure. Now we have an official confirmation of this trend from the latest RBI analysis released for the March 2022 quarter.

According to the RBI data, the operating profit growth of listed private companies slowed across broad sectors in the March 2022 quarter. This was largely on the back of a sharp rise in expenditure. This analysis was done by the RBI based on the Q4FY22 data of the financial results of a total of 2,758 listed non-government and non-financial (NGNF) companies. All other sectors are included in this study.

Let us first look at the manufacturing sector, which actually bore the brunt of this slowdown in operating profit growth. according to the RBI study, the operating profit of manufacturing companies decelerated sharply to just about 7% in the March 2022 quarter compared to a hefty 70% in the fourth quarter of FY21. Manufacturing has borne the brunt of costs like higher power costs, higher fuel costs, spike in oil costs etc.

Also, the commodity inflation in food and minerals has hit sectors like autos and FMCG the most in the quarter. Let us not turn to the non-financial services companies. Here we look at the IT companies and the non-IT companies separately. In the case of the (non-IT) services sector, the growth in operating profit slowed to 6.1% in the fourth quarter of FY22 as compared to 62.5% in the fourth quarter of FY21.
 

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This fall in the operating profit does look very large, but that is more due to the base effect as FY21 was a COVID recovery period. This sector was also hit badly by the lag effect of commodity price hike, which has strong externalities.

Let us turn to the IT services sector. Here also, the fall has been steel, if not precipitous. The operating profit growth of IT firms slowed from 19.7% in the fourth quarter of FY21 to 5.9% in the fourth quarter of FY22. There were several factors resulting in this trend.

Firstly, the outsourcing costs had gone up sharply. Secondly, manpower costs had also gone up sharply amidst a shortage of quality manpower. The sharp spike in attrition to above 20% levels in most IT companies also put a lot of pressure on these IT company performance.

What about the top line performance in Q4?

The good news, as we also saw in the quarterly data analysis, was that the top line sales of these 2,758 listed private non-financial companies recorded a robust growth of 22.3% in the fourth quarter of FY22 as compared to 22.8% in the fourth quarter of FY21.

To a large extent, this growth has been driven by lower volumes growth but greater boost coming from the pricing power. Here are some key takeaways on the top line front.

a) The total sales recorded by 1,709 listed private manufacturing companies was 24.6% in the fourth quarter of FY22. This was largely on the back of sales drive coming from sectors like petroleum, non-ferrous metals, iron & steel, chemicals and textiles.

b) The top line of IT companies continued to show robust growth at the rate of 20.7% as tech spending in the fourth quarter continued. The timely shift to digital IT services has helped the Indian IT industry weather the storm.

c) If you look at the top line sales of non-IT services companies it grew by 20.9% in the fourth quarter ended March 2022. This was largely driven by strong top line growth in transport, trade, telecom, hotel and restaurant sectors; on post-COVID revival.

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