Does Corporate India resonate the optimism of GDP data?

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Highlights

• India Inc’s Q4 report card good
• Banks post best ever show
• Demand trend in consumption mixed, premium categories do well
• Fall in input costs aid gross margin
• Travel and tourism sectors maintain dream run
• Investment-led sectors benefitting from government capex
• Export sectors challenging, many IT companies feel the heat of the sudden caution in the US
• Agrochemicals face challenges in the domestic market

Financials shine

The financial sector, which in a nutshell captures the mood of the economy, continued to do well with a strong loan growth, expansion in interest margin as loans repriced ahead of deposits, and benign credit costs.

In fact, non-bank financial companies (NBFCs), with good parentage and operating in niche segments (affordable housing finance, used vehicle, and MSME lending), also saw a strong growth in assets under management. Despite pressure on the funding costs, the spreads/margins remained range-bound due to their ability to increase the portfolio yields through improved product mix or by passing the cost to borrowers. Better asset quality led to a reduction in credit costs.

Moreover, life insurers, the other important segment of the financial sector, came out winners, thanks to the boost from the sale of high-ticket insurance products (premium above Rs 5 lakh per annum) ahead of the change in tax laws. General insurers also saw a good growth driven by health insurance.

Consumption – benefiting from input-price correction

For most of the domestic consumer-facing businesses, while demand trends varied, premium products did well. One common underlying theme was the decline in input costs that boosted gross margin.

Auto and auto ancillary companies performed well, thanks to the waning of the chip shortage and the softening of raw material prices. The demand for commercial vehicles gathered momentum. An important trend was the changing customer preference towards premium vehicles, both in the two-wheeler and the passenger car segments. Automakers, focusing on export markets, however, continued to struggle.

In the FMCG universe, volumes recovered and gross margin improved, while the EBITDA (earnings before interest, tax, depreciation, and amortisation) was maintained by cutting advertisement costs. Rural markets are seeing green shoots and premium products saw a higher off-take.

The retail sector posted healthy double-digit growth across segments, led by a robust store expansion and increased prices, even though the SSSG (same store sales growth) was under pressure due to restricted consumer spend on discretionary purchases. Companies selling premium products performed relatively better, while volume pressures were clearly evident in mass products. Margins, however, declined as companies were not able to fully pass on the cost increases.

Consumer durables continued to be sluggish, especially in the rural sector, because of  inflationary headwinds and unseasonal rains in some areas. In contrast, the industrial segment benefited from an uptrend in private and public capex. Margins continued to be under pressure despite the softening of raw material prices.

Diagnostics players saw double-digit growth in their core revenues, supported by a strong growth in test volumes and the price hikes taken in some of the high-end tests. The premium wellness segment reported a sturdy growth. The earnings performance of hospitals was strong on the back of improved realisations and better occupancies.

Travel and tourism – take-off in style

The other consumer-facing sector that continued its strong run was travel & tourism.

The aviation sector gained from the high domestic demand momentum. A sharp pick-up in international travel, along with benign oil prices, impacted yields positively.

The hotel sector continued to post a stellar performance with revenues and margins almost doubling year on year (YoY), led by higher pricing, increased occupancy, and the structural reduction in costs achieved during the pandemic.

Govt spending salvages capex-linked businesses

The investment-focused businesses, too, took rapid strides. With the domestic economy recovering and execution issues easing, most of the engineering companies posted strong growth in revenues. The order book, which moderated in the first half of fiscal 2023, is now back to the peak level. Companies are optimistic that fiscal 2024 is going to be even better as the full impact of the recent order inflows, higher execution, supply-chain improvement, and lower commodity prices, get reflected in their financial performances.

Strong traction in real estate and government-backed projects aided the demand for cement across all regions in a seasonally strong fourth quarter (Q4). Inflationary pressures continued to ease, providing relief to margins on a sequential basis (QoQ).

The ferrous space saw a recovery in volumes and prices quarter on quarter. The EBITDA per tonne also improved on the back of lower raw material prices and higher steel prices.

Exports – largely subdued with some exceptions

The export-oriented sectors were a mixed bag. The collapse of some banks in the US and the resultant risk-off sentiment impacted order inflows and the execution of some information technology companies. But the overall technology outlook in the medium-term remains strong.

For pharma, the performance of large generics was backed by a pick-up in the US business on account of new products.

The chemicals sector witnessed a stabilisation in gross margins on a sequential basis, suggesting an end to inventory de-stocking. The volume growth outlook is positive for domestic clients, whereas international markets continue to see a weak discretionary demand.

The agrochemicals space was disappointing with subdued volumes and lower price realisations as lower commodity prices were passed on to end clients. Further, high-cost inventory and higher freight costs weighed on the margin profile.

With interest rates largely peaking out globally, the demand scenario should look up and support earnings, though the probable El-Nino impact on monsoon remains a key watch.