The second COVID-19 wave started to spike up during the fag end of the fourth quarter. Hence, it is unlikely to have a material impact on the upcoming earning season. The ongoing recovery and the pent-up demand helped the companies to turn the corner during the quarter. The lower base of last year is also likely to work in their favour during the upcoming quarterly results.
Margins to Remain Under Pressure
Although the demand remained stable, companies are likely to report margin erosion during the quarter due to the volatile commodity prices. Prices of most of the essentials like crude, metal, and agri-based commodities spiked up, affecting the overall production cost.
The companies have responded to the situation by reducing the operational cost and increasing the prices of their products. Sectors like FMCG, auto, and consumer discretionary took multiple hikes during the quarter to protect their margins.
Lower Base of Last Year
The country was under strict lockdown during the same period last year. It impacted the performance of the companies as they faced a lack of demand, production cuts, and supply-related constraints.
The situation was exactly the opposite in the recently concluded quarter where companies were benefited by the pent-up demand. Given the extreme circumstances during both quarters, apple to apple comparison will not be the most suitable approach. It would be better to compare the performance on the basis of the last two years to get the most appropriate picture.
Cash Flow Improvement
Most of the companies had to plunge into their reserves in order to survive the lockdown. It depleted their resources to a great extent. Hence, it would be important to see up to what extent companies have managed to rebuild their cash reserves.
Effective utilization of cash flow and rebuilding of resources would be an important factor to determine the financial strength of the companies.
Closing Comments
While rising COVID-19 cases are unlikely to have a material impact on the fourth-quarter earnings. It is certainly going to be crucial in the first half of FY22.
Therefore, management commentaries will be crucial in determining how they are planning to tackle the emerging situation and business scenario they are anticipating in their business in the June quarter and beyond.
