Downgrades are expected to outnumber earnings upgrades for FY22 after the Q3FY22 results season. With the trend in results during the December 2021 quarter somewhat mixed, at least 55-60% of companies are likely to see earnings revised downwards, although in many instances the cuts may be very small.

After a very secular strong performance in the last four or five quarters, when India Inc bounced back spectacularly, operating margins were clearly under pressure in Q3FY22. The elevated cost of raw materials has hurt most businesses and unless prices of inputs come off sharply, profit margins would continue to be under pressure. For a universe of 1,754 companies (excluding banks and financials), the raw materials cost, as a share of sales, was up nearly 500 basis points y-o-y. Most companies appear to have de-leveraged their balance sheets; the interest bill for the December 2021 quarter was flat.

Managements in consumer-facing industries have expressed concern at the high inflation that they believe could keep demand subdued. Volumes at Hindustan Unilever, for example, went up by only 2% y-o-y while at Marico and Godrej Consumer, they were flat.

At Tata Steel, standalone sales volumes declined 5% y-o-y on muted domestic demand and weak export market. SAIL delivered an operating profit that was below estimates because volumes were weak and costs were higher.

Sectors such as two-wheelers have seen demand slacken because of the rise in ownership costs. Volumes for motorcycles fell 20% at Bajaj Auto on muted demand and partly due to the shortage of chips. At Maruti Suzuki, they were down 13.2% y-o-y.

Where companies have strong brands, they have made up for weak volumes through better realisations. The net average selling price at Maruti, for instance, went up by 15% y-o-y. Page Industries was able to take price hikes of around 8% towards the end of the quarter.

Consumers could resist the high prices and curb spending. Growth could taper off in H2FY23 – on the back of fading pent-up demand, high prices and little private sector investment – and corporate India’s revenues could slow down. Business has been dull post the festive season as seen in the volumes at companies like Havells.

Sectors that have seen a fairly big erosion in margins, due to rising input costs, include cement, steel & generic-pharma. But firms in other sectors, too, were hit. At BHEL, gross margins were down 100 bps y-o-y hit by higher commodity prices on nearly 50% of fixed price-based order backlog. Marico’s consolidated gross margins fell 320 bps while at JSW Steel, ebitda margins contracted by nearly 500 bps y-o-y. At Godrej Consumer, consolidated gross margins at came in at 50.7%, down 440 bps y-o-y.