Q2FY22 result season is here.
Although it’s early to generalize any trend at this juncture, Q2 seems to be a season of impressive top lines and disappointing bottom lines for manufacturing and consumer-facing companies.
Profit margins of consumer-goods companies, such as Asian Paints, Havells, Nestle, and HUL have come under pressure sequentially.
And 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.
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 in Q2FY22, thanks to robust growth in motorcycle and three-wheeler volumes.
If you remember, for the last few weeks we have been suggesting that investors need to be careful but not fearful. This is exactly the situations we were referring to.
In the post-earnings call, the management of Asian Paints described the raw material price inflation as ‘unprecedented and perhaps the steepest in the last 4 decades’. HUL and Nestle also expect inflation to remain sticky in the foreseeable future. Managements of these companies have given cautiously optimistic forecasts.
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.
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.
Rising inflation is affecting even cement and building material companies. For instance, India’s largest cement company UltraTech has been facing inflationary pressure with logistics, energy and raw material costs rising. UltraTech’s EBTDA margins eroded 540 basis points on a Q-o-Q basis.
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.
Will interest rates go up in the foreseeable future?
Will the government finally slash taxes which were levied on fuels during the pandemic as an emergency measure?
Finally, will you look at some of the evergreen consumer-facing companies if cost-pressures make them cheaper over the next few quarters?
We will be happy to hear from you!
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