India Inc Q1 earnings a mixed bag; outlook stays cautious

Excluding banks and financials, net profit growth for 2,972 companies was still healthy at 33.9%, while PBIDT for the same companies grew 23.2%.

“Overall, Q1FY24 has been positive for the market, with most companies delivering better Ebitda growth than revenue as most sectors had seen raw material tailwind,” said Maulik Patel, director-research, Equirus. Ebitda stands for earnings before interest, taxes, depreciation and amortization.

Revenue growth has sustained, though at a slower pace. Analysts said the impact of inflation on revenue growth during previous quarters is normalizing. Revenue growth of the corporate universe came in low single digits.

Nifty companies also showed impressive earnings growth. “Nifty earnings growth has been strong, led by sustained revenue growth and operating margin expansion driving 25% net profit growth for Q1,” said Sushant Bhansali, CEO, Ambit Asset Management. In addition to better operating performance, other incomes rose as well. Improved operating profits and higher other incomes were able to mitigate the impact of an increase interest costs.

Earnings were modestly ahead of expectations, said analysts at Kotak Institutional Equities. They, however, added that the bulk of the outperformance was due to a large beat in the case of only one company (JSW Steel) and higher-than-assumed other income in several cases.

“The market had euphoric expectations for Q1, and the actual results are marginally below; however, the overall performance is robust enough on the earnings growth front,” said Vinod Nair, head of research at Geojit Financial Services.

Consumer demand was robust in auto and financial sectors with the auto sector benefiting from moderation in metal prices. According to analysts, state-run banks and small banks showed impressive category-specific results. Earnings momentum was also supported by hotels and a few others. However, IT, cement, chemicals and metals saw challenges and year-on-year performance was impacted by lower realizations, cost challenges and global demand constraints. The pharma sector showed some spark, thanks to some respite on US pricing concerns.

Overall performance was mixed, with banks having done well and pharma also seeing a good uptick, said A.K. Prabhakar, head of research at IDBI Capital. Banking sector earnings, however, may have peaked as seen in their stock performances, while any correction in pharma will give a good entry point, he added. The outlook also remains cautious. Global demand remains subdued, and a few prominent blue-chip companies have delivered below-par Q1 results, adding to concerns of a downgrade in forecast and offering a mixed review, said Nair.

Even incremental earnings for large-caps and Nifty companies were contributed only by a few. Motilal Oswal Financial Services analysts said, “The top five companies within our coverage universe contributed 84% to the incremental y-o-y accretion in earnings (three oil marketing companies contributed 59%, followed by SBI – 13% and Tata Motors – 12%). Similarly, within Nifty, five companies (BPCL, SBI, Tata Motors, HDFC Bank, and ICICI Bank) contributed 100% to the incremental year-on-year accretion in earnings during the quarter.”

Bank earnings are likely to have peaked, and the best earnings for oil marketers are also likely to be behind. Slowdown and defaults in China are fuelling concerns at a time of weak global demand. Chemicals, commodities and many other sectors may see a prolonging of the oversupply situation if Chinese demand stays weak, which may also impact prices. Further, monsoon activity has slowed in August and a pick-up will closely watched, said analysts. “We believe rural recovery may take place in another 1-2 quarters provided El Niño doesn’t affect food grain production,” said Equirus’s Patel. Raw material prices have been softening across commodities, particularly metal. However, the recent increase in crude oil price, if sustained around $90, may lead to a sequential increase in raw material cost, added Patel.

Liquidity in the system has increased, led by the withdrawal of Rs2,000 notes and thereby, the systemic impact of higher interest rates has been lower than anticipated, said Bhansali. However, banks are seeing dips in net interest margins, suggesting prolonged high rates may have implications for future profitability, said analysts. “The expectations for FY24 corporate earnings growth are already robust, at 18-20% y-o-y. Hence, we cannot expect further upgrades due to the slowing global economy, while the sustenance of high expectations is a good enough positive sign,” said Nair.

Updated: 19 Aug 2023, 12:24 AM IST