ICRA says Indian Inc reports slow revenue growth in Q3

In a report, ICRA said margin pressure is likely to ease in the coming quarters given softening commodity prices, but uncertainty remains.

“Despite the fact that it was a seasonally strong quarter owing to the holiday season, sequential revenue growth was relatively muted due to inflationary pressures on consumer sentiments and uneven sectoral trend. Airlines, Hotels, Gems & Jewellery, Capital Goods and Fertilizers Sectors such as reported revenue growth on a sequential basis, driven by strong demand supported by consistent price increases and festive period sales.

ICRA’s analysis of Q3 performance of 620 listed companies, excluding financial sector entities, showed expected positive revenue trends with year-on-year (YoY) growth of 17.2% despite sequential revenue growth of 1.4%.

Almost all sectors reported revenue growth in year-on-year (YoY) terms in the third quarter, led by hotels, oil and gas, auto, airlines and electricity, which is likely to propel GDP growth in that quarter.

Shruti Thomas, Assistant Vice President and Sector Head at ICRA, said, “The year-on-year increase in revenue during Q3 FY2023 was primarily driven by increased realization levels due to input cost inflation, as well as across sectors The growth was moderated by a revival in demand. , ICRA’s analysis shows that the operating profit margin (OPM) of Indian industrials is set to decline by 237 bps on a year-on-year basis in Q3 FY2023 due to increase in commodity prices as well as energy costs. This is due to inflation in input costs arising from the increase in GDP, which may not be fully accounted for. delivered to customers.

Thomas said operating profit margin, however, increased 180 bps sequentially to 16.3% during the quarter, aided by softening prices of several commodities and general price increases by institutions. Sequential margin expansion was most visible in sectors such as aviation, hotels, cement and power.

Margin pressure is likely to ease further in the coming quarters given further softening in commodity prices, but uncertainty remains due to the geopolitical situation. Therefore, despite some softening and stabilization in commodity prices in recent months, India Inc’s earnings improvement potential faces headwinds such as energy cost inflation, bearish trends in developed markets, and the impact of foreign exchange fluctuations on both imports. Will depend on as well as export-oriented sectors,” said Thomas.

The interest coverage ratio of ICRA’s sample, adjusted for sectors with relatively lower debt levels (IT, FMCG and pharma), declined year-on-year to 4.3x from 5.1x in Q3FY23, mainly due to a) higher interest rates than the historical trend due to lower incomes in select sectors and b) higher interest rates behind the rate hike by the Monetary Policy Committee (MPC).

ICRA expects credit metrics to show a gradual improvement going forward given the recent trend of softening commodity prices, general price increases by corporates and reduction in energy costs. However, the impact of ongoing geopolitical developments and possible recessionary conditions in parts of the global economy as well as further monetary policy tightening on the macroeconomic environment are still to be seen,” Thomas said.

ICRA said it believes that the sequential improvement in the overall performance of Indian industry depends on how well the institutions are able to deal with the upcoming headwinds. Normal price increases by entities across sectors along with stabilization of input costs and easing of supply chain constraints like semiconductor chip shortages could pave the way for margin recovery in the coming quarters.

“However, concerns of a global recession coupled with the current geopolitical situation, which could adversely impact demand sentiments, could derail the pace of recovery. In addition, fluctuations in foreign exchange rates will have an impact on the revenue growth and earnings profile of Indian corporates.