The distress faced by unorganized small businesses during the second wave of Covid and the market share gains of large companies that have gone largely unscathed are said to be reflected in their June quarter results.
Small businesses suffered under the weight of localized and uneven bottlenecks and shorter opening hours during the first fiscal quarter, affecting operations as well as consumer demand. The quarterly earnings season started on July 8 with Tata Consultancy Services Ltd.
Analysts said small businesses had lost market share to their larger competitors, although FY21 was a year of recovery in corporate profits for India Inc., marked by expanding margins and a strong deleveraging of the balance sheets.
“The continuity of the Covid restrictions means that the differences will continue to occur in the June quarter between organized and unorganized players,” said Deepak Jasani, head of retail research, HDFC Securities.
He said once the lockdowns were fully relaxed some of the unorganized players would adjust and resume their activities, but several more would have been forced to close the shutters.
Among sectors, retail, jewelry, real estate, clothing, construction products, footwear, electrical equipment, plastic / rubber products, food products, security services, dairy products, hospitals and diagnostics, beverages, tobacco, leather, wood and wood products, paper and Paper products, chemicals, metal fabrication and education have a strong presence of unorganized businesses and the pandemic has accelerated the pace of market share transfer from them to organized businesses, Jasani said.
Edelweiss Securities analysts said the divergence in growth rates between organized and unorganized companies can be attributed to factors such as the tightening of lending standards for small and medium-sized enterprises (SMEs) by banks, the lack of availability of raw materials and labor shortages. Large players, by design, are better positioned to weather a supply shock than small firms, the brokerage said.
Meanwhile, the June quarter should see pressure on expanding margins as raw material costs rose sharply. The prices of basic commodities like crude oil and metals jumped during the quarter. Brent prices rose 18%, while aluminum, copper, zinc and lead gained 5 to 16%.
According to JM Financial, organized businesses are best placed to pass on price increases to offset higher raw material costs. “Even in a period of high input price inflation in the past, the trajectory of income growth has not been materially affected, within a quarter or two and organized actors are actually gaining market share in a period of high inflation in input costs, ”he said. .
In the white goods and durable goods segment, analysts at ICICI Securities expect the migration from the unorganized to the organized sector to regularly generate value for the latter. “The large household appliance market in India is dominated by multinationals. Due to constant technological changes and higher investments in R&D (research and development), we believe they will continue to dominate said segment of the market, ”said the brokerage.
The white goods and durable goods market comprising the top five segments of television, washing machines, air conditioners, refrigerators and dishwashers is dominated by large multinationals such as Whirlpool, Samsung and LG.
Mid-cap companies could experience flat sequential growth in the June quarter, according to Reliance Securities Ltd, as the strong demand momentum seen in the second half of FY21 was halted due to the second. wave of Covid from mid-April, with use down 30 to 40% in April and May.
“The mid-cap companies in our hedging universe faced challenges on the demand front with limited market hours in all states. The EBITDA margin is expected to decrease by 360 basis points (bps) year-on-year and 30 bps in QoQ, ”said Reliance Securities.
Kotak Institutional Equities Research expects net profits of Sensex companies to jump 72% from a year ago in the June quarter, but decline 3% sequentially. For Nifty stocks, the brokerage expects profits to rise 127% from a year ago, but fall 6% sequentially.
Kotak estimates Sensex earnings per share at ₹2 303 for FY22 and ₹2,631 for FY23, and Nifty at ₹715 for FY22 and ₹813 for FY23. He expects banks, capital goods, IT services, metals and mining, oil, gas and fuel companies upstream consumables to lead profit growth in the first quarter.