Price hikes help India Inc fight margin pressure; operating profit up 20%, net profit by 34%

Gross margins at Asian Paints came off by 450 bps y-o-y as the company was able to only partially offset the high raw material costs with price increases of 22% y-o-y.

Despite the inflation in inputs, India Inc seems to have managed to protect its margins reasonably well by passing on the costs to consumers. Not all companies have been able to take price hikes to offset the entire increase in costs, but aggregate numbers for Q4FY22 show they have covered some ground.

For a universe of 927 companies (excluding banks and financials), operating profit margins contracted by only 50 basis points year-on-year to 16.37%, in the three months to March. Consequently, the operating profit went up by a good 20% y-o-y and the net profits by a handsome 34%.

Management commentary suggests companies plan to either raise prices further or offer smaller volumes for the same price to protect margins. By a rough reckoning, prices have been raised by 5-15% for consumer staples, 10-12% for durables, around 10% for automobiles, 5-15% for residential properties and around 5-8% at fast food eateries. By passing on the cost increases, companies have managed to grow their top lines despite, in many cases, selling smaller volumes. For the sample of 927 firms, net sales in Q4FY22 rose 24.2% y-o-y.

Hindustan Unilever, for instance, has upped prices by about 10%, enabling it to report a revenue growth of 11% y-o-y in Q4FY22 despite volumes staying flat. Despite a 9% y-o-y drop in volumes, Eicher Motors posted a revenue growth of 9% y-o-y, thanks to a 21% y-o-y increase in the average selling prices (ASPs). At Bajaj Auto, Ebitda margins were down 80 bps y-o-y despite price hikes. Tata Steel’s margins in Q4FY22 were softer but the management is hoping better realisations will offset the cost inflation in the current quarter.

Gross margins at Asian Paints came off by 450 bps y-o-y as the company was able to only partially offset the high raw material costs with price increases of 22% y-o-y. Again, the profit performance at JSW Energy was a modest one as the higher realisations of 4% y-o-y were inadequate to offset the higher cost of generation, which rose 23% y-o-y.

While profitability may have been under some pressure, the good news is that businesses that were hit by the pandemic are bouncing back with the economy opening up. AB Fashion and Retail, for instance, reported better-than expected Q4FY22 revenue growth of 25% y-o-y as the distributor channel recovered. Avenue Supermarts posted Q4FY22 revenue growth of 18% y-o-y, driven by a revival in same store sales growth and the contribution from 21 new stores added during the quarter. Sales of big-ticket items, however, were somewhat subdued. At Titan, for instance, jewellery sales were flat, impacted by the volatility in gold prices.

The strong show by commodity players and some turnaround performances do skew the numbers somewhat. The profit growth slows to 21.6% y-o-y from 34% if Reliance Industries, Tata Steel, Tata Motors and Adani Power are excluded; the four together account for 20.2% of the sample’s revenues. Tata Motors narrowed its losses to Rs 1,033 crore in Q4FY22 from Rs 7,605 crore in Q4FY21, while Tata Steel posted a strong 47% y-o-y growth in net profits. Adani Power posted a net profit of Rs 4,645.47 crore against Rs 13.13 crore reported a year ago.