Q2FY22 India Inc earnings show that inflation isn’t transient

The Q2FY22 earnings season in its first leg demonstrates that it’s a season of impressive top lines and disappointing bottom lines for manufacturing and consumer-facing companies. If one looks at numbers of consumer-goods companies, such as Asian Paints, Havells, Nestle, and HUL it is visible that profit margins have come under pressure sequentially.

“Purely going by market reactions to their Q2 performance so far, it appears that investors are suddenly waking up to a harsh reality —inflation isn’t transient,” said Vinit Bolinjkar, Head of Research of Ventura Securities.

According to the brokerage firm shares of consumer-goods companies have taken a beating post-earnings except those outdoing market expectations. Not that the performance of corporations has been exceptionally bad, but expectations of investors from India Inc have been exceptionally high.

With the help of efficient cost management and calibrated price hikes, HUL grew its top line by 12% in the quarter gone by. However, the 4% volume growth disappointed investors. In contrast, at counters where expectations were low and surprises were big, markets seem to have rewarded such companies swiftly. TVS Motors is a case in point. Despite higher costs, the company reported the highest ever revenue and EBITDA (Earnings Before Interest Tax Depreciation & Amortisation) in Q2FY22, thanks to robust growth in motorcycle and three-wheeler volumes.

Balancing act

While leading consumer-facing companies are fairly confident about future demand trends, but they are in a catch-22 situation—whether to provide price stability to consumers and thereby protect future demand or increase prices to pacify investors endangering volume growth.

Thus, to strike a balance between these two alternatives, many of them have either preferred to defer price hikes or have applied them in moderation, Bolinjkar added.

Unlike past instances where cost pressures were limited to a category of inputs; this time price escalations have been across the board. Freight costs, packaging materials and commodities have seen a firm price trend. And the supply of key materials has become inconsistent in the case of a few product categories.

Hence it remains interesting to see at what point policymakers acknowledge that inflation isn’t transient and decide to intervene. Naturally, the sooner remedial action is taken, the steadier would be the path to normalization.