Early-bird results show tepid India Inc profits in Q4 season

BL Kashyap and Sons: The civil engineering and construction company has secured new order worth Rs 238 crore, from Embassy Construction. The said contract is expected to be executed within 28 months. The total order book as on date stands at Rs 2,518 crore.

The initial January-March 2023 quarter earnings paint a dim picture of corporate profits, mainly due to lacklustre growth reported by IT firms. However, there is a silver lining to this trend: an improvement in operating profits.

Aggregate net sales increased by 14.63 percent YoY, according to a Moneycontrol analysis of 180 companies which have reported earnings for the March quarter, and for which comparable data was available for the preceding 15 quarters. While this is still a notable increase, it is the slowest growth rate since the December 2020 quarter.

The net profit growth, at just 4.2 percent YoY, was flat compared to the same period last year, hit by higher interest costs and depreciation, although there was a sequential growth of 14.54 percent. Interest costs and total expenditure have risen by 45.6 percent and 12.38 percent YoY, respectively. The analysis excluded banking, financial services, insurance, and oil & gas firms as they follow a different revenue model.

Anmol Das, Head of Research at Teji Mandi, said, "Overall demand looks dented due to inflation globally, as observed from the net sales growth. However, it's important to consider that early earnings data is significantly biased due to the lacklustre growth posted by IT companies."

Jump in operating margins

During the quarter, operating profit margins improved to 22.85 percent, marking the highest recorded value in the past four quarters, as compared to 21.69 percent a quarter ago. According to analysts, many sectors including FMCG, manufacturing, and cement firms saw improvement in margins.

"The bounce-back in operating profit margins is impressive, and we anticipate even higher margins by the end of the earnings season,” said Nirvi Ashar, a fundamental analyst at Religare Broking.

“The reason behind the improvement in operating profit margins for FMCG, manufacturing, auto ancillary and cement companies is the decline in prices of metals, raw materials and fuel during most of the previous fiscal year. As a result, the market is keeping a close eye on the earnings of these sectors," Ashar said.

While cautioning that the early earnings data should be interpreted with care, given the tepid performance of IT firms that may have a significant impact, some analysts suggested that the trends observed in the early reports could change as a large number of companies are yet to disclose their numbers. Ashar advised adopting a "wait and watch" approach to evaluate how the remaining figures fare in this quarter.

IT firms disappoint

The weak earnings of India's top five IT firms, including Tata Consultancy Services, Infosys, Wipro, HCL Tech, and Tech Mahindra, failed to meet market expectations. These companies have also expressed a lack of optimism for the near future, resulting in a significant decline in net additions for fiscal 2023. This trend can be attributed to the ongoing banking crisis in US regional banks and European banks along with an unfavourable macroeconomic climate.

While the long-term outlook for IT services raises concerns about a potential reversal in the sector, it would be prudent to monitor the situation for another quarter, Das said. “The impact of the mild banking crisis in the US economy is likely to become apparent for Indian IT services companies in the first quarter of the upcoming financial year, if indeed it has any effect," he said.

Consumer, auto companies shine

In contrast, Hindustan Unilever Ltd reported a standalone net profit of Rs 2,552 crore for the March quarter of FY23, reflecting a growth of 9.66 percent from the previous year. Total revenue also increased by 10.81 percent to Rs 15,053 crore. However, the underlying volume growth during Q4 was 4 percent, lower than expected. Bajaj Auto's Q4 consolidated net profit came in at Rs 1,704.74 crore, marking an 11.70 percent YoY growth from Rs 1,526.16 crore in the same quarter last year. The revenue from operations rose by 11.96 percent to Rs 8,929.23 crore, with the domestic business's sustained momentum contributing to the double-digit revenue growth.

In a significant milestone, Maruti Suzuki became the first passenger vehicle maker in India to cross Rs 1 lakh crore revenues, in FY23. The company reported a 42 percent YoY increase in net profit at Rs 2,670 crore in the quarter, driven by recovering car sales and easing supply chain disruptions.

Banking holds fort

The banking sector too reported positive earnings, with a continuation of the upward trend in loan growth, a decrease in provisions, and an improvement in asset quality, lifting sentiments in the stock markets. For example, HDFC Bank reported a 20 percent jump in net profit and a 17 percent rise in advance while ICICI Bank reported a 30 percent surge in net profit and an 18 percent rise in loan growth. IndusInd Bank’s net profit surged by 50 percent with a 21 percent increase in loan growth.

Looking ahead, Neeraj Chadawar, Head - Quantitative Equity Research at Axis Securities, emphasised that the demand outlook for the banking and the domestic cyclical sectors remained robust even as discretionary demand remained subdued after the festival season. Chadawar said that monsoon will likely play a key role, making rural recovery a key focus area for the market.