Markets, economic forecast stay up, but India Inc profit growth declines in Q1

On the other hand, the net profit of these companies registered a decline in growth at 12.3 per cent to Rs 104,225 crore as against a growth of 18.4 per cent growth in the same period a year ago at Rs 92,847 crore, BoB analysis shows. “The initial picture does not appear to be that positive when it comes to growth in sales. It is more on expected lines. Last year, there was a lot of pent-up demand which led to higher growth in sales. It is something which may not be replicated easily this year,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

Of the 47 sectors, 14 likely saw a fall in revenue, while 15 may have logged slower sequential growth, an analysis by CRISIL MI&A Research of over 300 companies (excluding those in the financial services and oil & gas sectors) indicated. Lower realisations and slowing global demand for metals and industrial commodities affected makers of aluminium, steel, ferro alloys and petrochemicals, Crisil said.

However, stock markets are flying high, with the Sensex surging 13 per cent since April 2023 and most big and medium cap stocks trading at all-time highs. IMF has upgraded India’s growth forecast to 6.1 per cent from 5.9 per cent due to strong domestic investments.

The revenue of aluminium manufacturers likely fell 14-16 per cent owing to an 18-20 per cent decline in international prices and a sedate growth in volumes, Crisil said. Steel products may have logged a 6-8 per cent contraction in revenue, impacted by the high base of the previous fiscal and a drop in realisations, which offset volume growth. The power sector is likely to see relatively slower 5 per cent revenue growth.

Quarterly numbers from two market leaders – Reliance Industries Ltd (RIL) and Hindustan Unilever Ltd (HUL) – reveal the reality with their performance disappointing the market. RIL reported a nearly 11 per cent decline in consolidated net profit at Rs 16,011 crore for the first quarter ending June as against Rs 17,955 crore in the same period last year. RIL said its mainstay refining and petrochemicals operation, which the conglomerate calls oil-to-chemicals (O2C), saw a decline in earnings “due to a sharp fall in fuel cracks from exceptionally high levels” in April-June of last year.

FMCG major HUL reported an eight per cent rise in profit after tax for the June quarter at Rs 2,472 crore as against Rs 2,289 crore in the same period a year ago.

“Volumes were a miss on our/street estimates. However, rural markets have seen volume growth (on a low base). The quarter saw sequential margin improvement with inflation moderating across most commodities (excluding tea and coffee) which was reinvested in A&P to help drive demand,” said Amnish Aggarwal, Head of Research, Prabhudas Lilladher Pvt Ltd.

On a sectoral basis, banking has done pretty well. RIL was an exception because oil and gas has taken a hit. The IT sector too is under increasing pressure, given the slowdown in the US and Europe, and the fresh set of results offer pointers to the earning woes.

From a domestic perspective, consumption is where there is some worry. While HUL is down, the margins of Asian Paints are better but the top line has been a bit worrying, according to Centrum Broking.

“The challenge in the consumption sector will remain. The recovery is going to be muted. The next trend people will watch out for is closer to the festival season,” said Nischal Maheswari, CEO (Institutional Equities), Centrum Broking. This means the forthcoming festive season in September-October will indicate whether the corporates are likely to witness a recovery in demand and margins.

The banking sector benefited from the rising interest rate scenario with HDFC Bank and ICICI Bank profits rising by 30 per cent and 40 per cent respectively. Good show by construction major L&T (46 per cent growth in profit) and Tata Motors is expected to add to the corporate sector recovery. “The June quarter performance is on the back of robust topline and bottom-line growth, supported by excellent balance sheet management, resulting in improved return ratios. The group’s focus continues to be on cash generation, planned capital allocation and on enhancing shareholder’s wealth,” said S. N. Subrahmanyan, MD & CEO, L&T.

What is adding to the burden is the rising interest outgo of the manufacturing sector following the hike in the Repo rates by the RBI. The interest outgo of the manufacturing sector shot up by 22.19 per cent to Rs 70,642 crore in FY2023 as against a decline of 18.1 per cent in the previous year (FY2022), according to RBI data.

The ongoing fiscal should see an EBITDA (earnings before interest, taxation, depreciation and amortisation) margin benefiting from continued correction in commodities, including crude oil, the price of which fell a third during the first quarter. Apart from seasonal weakness, domestic prices of steel products (flat and long steel down 15 per cent) and metals such as iron ore and aluminium (down 17 per cent) have been easing because of subdued global demand and cheaper imports, which, too, supports profitability, Crisil said.

Aniket Dani, Director, CRISIL MI&A Research, said, “Of the total on-year incremental revenue during the first quarter, nearly 60 per cent would have been contributed by just three segments — investment-linked, export-linked, and consumer discretionary products and services. Within these, a majority of this rise is likely driven by the automobile and cement sectors. Export-linked sectors are seen bucking the decline largely on the back of healthy growth in IT services and pharmaceuticals.”

The future, though, is not all that gloomy. High-frequency indicators such as GST collections, PMI Manufacturing & services indices, UPI transactions and E-way bills are pointing upwards on a sequential basis, indicating robust demand in the economy, according to an Axis Securities report. Rural demand, too, is recovering and may pick up further in upcoming months on account of better Rabi crops realization, a cool-off in inflationary pressures and a healthy domestic economic environment, it says.