We have entered into July and the second quarter of FY22 has begun. Unlike the first quarter, Q1FY22, where the doom and gloom of Corona overshadowed everything else, this quarter holds the promise of a lot of good tidings. There is sense of optimism as the pandemic has ebbed a bit – not gone, there yet but at least vaccination is happening. The day-to-day activities are not yet normal but not as restricted as before – everyone has learned to live around and with the pandemic. Thus Q2 will be much better than Q1 – of course, we are assuming that the third wave will not happen in Q2 but in Q3 as predicted by various virologists.
So, as we begin this new week of this new month and new quarter, look at these indicators – it will give you a fair idea what the market is thinking…
Moody’s put out its macroeconomy economic outlook and said that the damage to the Indian economy will remain restricted to Q1 as the current restrictions are more targeted, localized and less stringent. Also with consumers adapting, it expects that mobility and economic activity will likely accelerate in the second half of year as pace of vaccinations picks up.
Does this mean then that Q1 will be a wash-out? Not really. Some sectors are bound to show the stress as consumers preferred to conserve cash and bought only essentials – consumer durables and auto sectors could show some pressure while pharma, construction, infra and IT could be the winners. TCS will set the mood when it announces its Q1FY22 numbers on Thursday and that will set the mood.
That’s good news and what we need to watch out for in Q1 earnings - the amount of de-leveraging done and how debt costs have come down. Cost management will be key in Q1 earnings and keep a watch on the cash flow – that will indicate the presence or absence of stress. As raw material costs rise, companies resorted to cleaning up their balance sheets, putting off aggressive expansion and capex plans. FY21 has been about deleveraging and let’s see if this shows up in the earnings of Q1FY22.
And there is one more indication – Marico, which announced its Q1 update on Friday, said that it expects revenue from its India business to grow more than 30%, aided by a double-digit volume growth but expects a muted bottom line growth during the quarter. It said that the impact on business was lesser than the first wave witnessed last year, as supply chains were evolved enough to cope with localized and staggered lockdowns and retail stores were also allowed to operate for limited number of hours during the day. As COVID positivity rates subsequently dropped to pre-second wave levels, overall demand has been trending better since early June.
Marico said that as key input costs started easing after peaking at the start of this quarter, gross and operating margins should see significant sequential improvement in Q1 and thereafter trend towards medium term expectations. However, it expects operating margin in the quarter to drop sharply YoY, given the exceptionally high base (due to rationalisation of A&P spends and other overheads in the base quarter) and the arithmetic (high denominator) effect of significant pricing-led growth. And this is broadly what we can expect from most consumer non-durable companies in Q1 – a good growth in topline and muted bottom line.
Well, the bottom line of this story – the markets are set to soar again; there are more reasons to celebrate than cry; at least as of now.