India Inc's operating margins improve after two weak quarters

Representative Image

Indian companies saw an expansion in their operating margins in the March quarter, benefiting from the decline in commodity prices. This positive development in operating margins comes after two consecutive quarters of weakness, indicating a notable improvement in earnings momentum. The improved performance justifies the near 11 percent rise in the BSE200 Index from the lows of March.

A Moneycontrol analysis of 148 companies of BSE200 Index that have reported their earnings for the March quarter and for which comparable data was available for the preceding 15 quarters showed that aggregate net sales increased by 12.3 percent YoY, the slowest growth since the December 2020 quarter. Sequentially, it grew 7 percent.

Net profit of these companies sequentially rose the fastest in six quarters to 21.44 percent while year on year it grew at a modest 2.3 percent after excluding banking, financial, oil and gas and insurance companies. These however marked a sharp improvement compared to the 6.3 percent and 19.7 percent profit decline seen in the previous two quarters compared to a year earlier.

Growth was boosted by improved operating performance. Operating profit margins for the quarter for these companies stood at 21.27 percent, the highest since four quarters, compared to 20.97 percent last quarter.

Also Read: Q4 Results Scorecard: The agony and the ecstasy

Meanwhile, interest cost surged 23.22 percent YoY, its biggest jump since June 2019 quarter. Sequentially it rose just 3.2 percent. Total cost advanced 14.5 percent YoY and sequentially it rose 7.1 percent.

"The decline in revenue growth can be attributed to multiple factors, including lower selling prices and a moderation in demand,” said Vinod Nair, Head of Research at Geojit Financial Services.

“This is primarily influenced by the significant decrease in commodity prices, resulting in a drop in overall realisation. Additionally, the global recessionary pressure has slightly reduced external demand. However, despite these challenges, the overall impact on margins is positive. This can be attributed to a steady domestic demand, supported by the China Plus strategy, and reduced operational costs due to lower raw material prices," Nair said.

The widely held view among analysts is that the corporate performance during the March quarter was better than expected. "Amid a challenging global macro backdrop, India Inc.’s profitability remained healthy in 4QFY23 – in line with our expectations," said Motilal Oswal in a note to investors.

According to IIFL Securities, banks, auto ancillaries and tyre firms reported a good set of numbers. Consumer discretionary, retail and metals and mining fared poorly.

According to Siddhartha Khemka, Head-Retail Research, Motilal Oswal Financial Services, sector-wise, gross margin for a few contracted sharply, while several sectors bounced back. Automobiles, Consumer, Real estate and Healthcare saw more than 100 bps improvement YoY. For consumer companies, the full effect of price hikes has been realised, commodity costs have stabilised or even declined in some cases, and there has been an improvement in product mix for a few companies which led to margin improvement.

Healthy operating performance and correction in inventory levels resulted in a sequential decline in net debt levels for companies such as Ashok Leyland (Rs 2,000 crore in the third quarter of FY23 to net cash of Rs 243 crore), Motherson Sumi (by Rs 1,000 crore quarter on quarter to Rs 7,470 crore), Apollo Tyres (by Rs 400 crore year on year to Rs 4,300 crore) and Tata Motors (by Rs 13,800 crore QoQ to Rs 43,700 crore), according to Motilal Oswal in its recent note.

"In the case of auto companies, gross margin improved sequentially for the third consecutive quarter, while most of the management teams indicated a stable raw material trend in the near term. This was further supported by operating leverage benefits resulting in EBITDA margin expansion. For the banking sector, margins were stable while the banks with a high floating rate book saw an expansion," Khemka added.

Meanwhile, analysts say there has been a modest increase in margin forecasts, which has had a positive effect on the stock market. Still, investors will need to be watchful given that the global economy is expected to slow down in the latter half of CY23, brokers said.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.​