What India Inc’s Q1 earnings reveal about the state of the economy

Demand remains an issue but good start to the monsoon season and the next year’s general elections should give it a boost, say analysts.

Corporate India’s June quarter earnings season was marked by robust profit growth despite lacklustre revenue expansion as easing input costs buoyed margins, while a mixed showing by FMCG and consumer discretionary firms highlighted the lingering impact of inflation in some pockets of the economy.

Taking their Q4 FY23 momentum forward, banking and non-banking financial company (NBFC) names once again led the profit growth, while export-oriented sectors like information technology (I-T) bore the brunt of weak sentiment overseas.

“BSE500 topline slowed further to 6 percent with nearly 30 percent of them posting topline contraction (usually happens during crisis). The slowdown is more pronounced in global-oriented sectors (IT, chemicals), followed by low ticket consumption, while high-end consumption and capex seem to be doing well,” Nuvama Institutional Equities said.

High domestic real rates and a slowing global economy risk broadening the slowdown, it added.

“In order to adjust for the base effects, we think 5Y CAGR is probably the best metric given the series of disruptions in the base periods. On that basis as well, the topline is slowing for BSE500 companies but remains stable at 10 percent after excluding banks and commodities. While a 10 percent growth is higher compared to pre-Covid averages, it is still weak compared to mid-teens growth at the start of the decade,” Nuvama pointed out.

The fact that it is peaking at such levels is worrisome from the overall business activity perspective, it added.

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Apart from IT, the slowdown is most pronounced in the export-oriented chemicals sector.

“The more surprising is chemicals, where topline has moved into contraction (even during lockdowns, this sector had shown growth) despite ‘China + 1’ benefits,” it added.

According to analysts, the oil and gas sector was also a drag on the revenue growth for India Inc in the first quarter of this fiscal due to lower YoY crude prices. Besides, easing input cost pressures and rising competitive intensity meant firms were forced to pass on the benefit of lower prices to customers, which tempered their topline growth.

As per an analysis by Yes Securities, topline growth (excluding financials and oil marketing companies) for Q1 FY24 stood at a mere 3 percent YoY, the lowest in the last 10 quarters.

Veteran investor Ajay Bagga, chairman of Elyments Platforms, said while topline growth was muted, one must also look at sector-wise data.

“Auto had bumper numbers. Banks did very well. Cement and metals were muted but energy did well due to domestic base effect issues. Revenues remaining flattish was due to demand pickup not coming through. Profits went up as input costs were down year-on-year and these gains were not passed onto customers yet,” he told Moneycontrol.

Demand is an issue, Bagga said. “But the good thing is the general elections will see all levels of government and all parties spending hugely. The demand boost will come from there,” he added.

Capex push

Experts added that the Q1 results also show the rising trend of corporate capital expenditure, which bodes well for India’s medium-term economic outlook.

“Depreciation jumped 11 percent YoY as companies embarked on higher capex. Interest costs zoomed by 29 percent YoY, impacted by interest rate hikes as well as jumps in capex and working capital requirements,” Yes Securities said in a note to clients.

On the growing capital expenditure trend, analysts at foreign brokerage firm Jefferies cited factors like a 15 percent growth in cement volumes, a 40 percent-plus jump in EPC/capital goods order flow and rising property prices.

Listed companies’ real estate sales grew at a healthy clip of 13 percent in Q1 FY24, sustaining the post-COVID momentum. The growth was led by premium segments.

The rising private sector capex coupled with the government’s infrastructure spending is expected to fuel the country’s growth engines.

The finance ministry is on track to complete the country’s highest-ever budgeted capital expenditure of Rs 10 lakh crore in 2023-24. The ministry is aiming to frontload at least 60 percent of the spend in the April-September period, as per a top official.

The government is also frontloading the capex in the April-September period to fast-track the visible growth momentum as this is a pre-election year.

Also read: On track for full capex this year, will frontload 60% in H1: Government Official

“Order inflow momentum remains strong and broad-based while some pockets are witnessing moderation on a high base of last year. While government capex continues to remain the major driver, some greenshoots of private capex are visible in traditional as well as new age industries (such as data centres, green energy),” Yes Securities said.

Key monitorables for the capital goods sector would be order inflow growth, margin trajectory, execution efficiency and tendering activity towards the end of the year owing to general elections.

Demand signals

While most Q1 results were in line, FMCG firms saw a divergence — double-digit profit growth but anaemic volumes expansion.

Analysts said this was because while a fall in raw material prices boosted margins, rural demand remained subdued due to inflationary headwinds.

This is not to say elevated inflation is just a rural problem.

It was a weak quarter for the urban-focused consumer discretionary segment as well, with QSR, select retail and appliances categories showing lacklustre performance.

“The trend (was) partly blamed by managements on unseasonal rains and partly on the cumulative impact of inflation,” Jefferies added.

The problem was compounded for consumer-durables companies as a mellow summer reduced demand for air-conditioners and coolers, while consumers were also seen down trading to lower-priced products.

“Demand for entry-level products continues to be lower; while demand for premium products has started to moderate from the higher levels, which has started to impact urban areas,” Aakash Fadia of Yes Securities said.

The situation was much better for auto companies, which saw strong results on the back of robust demand and price hikes. It also benefitted from a low base, as dispatches were affected last year due to the global semiconductor shortage.

“Demand continues to remain relatively strong for the passenger vehicles segment with OEMs having new launches showing long waiting periods…The two-wheeler makers had a good marriage season, as seen in QoQ momentum, while exports remain weak,” InCred Equities said in a note to clients.

A better-than-expected start to monsoon season holds out hope for strong demand recovery in the festival season, while rainfall distribution pattern will be key for the tractors segment, it added.

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