Going by the smart 24% year-on-year (y-o-y) rise in net profits, it would seem like India Inc had an excellent March quarter. However, it’s the performance of the banks and other financial entities that has lifted the headline numbers. Excluding the banking, financial services and insurance sector, the results come across as a lot more sober; net sales for a sample of 1,518 companies grew just 6% y-o-y. While net profits were up a good 18% y-o-y, this was partly boosted by a big jump in other income of nearly 40% y-o-y. Operating profits for this sample were up 11% y-o-y, but this was a much slower pace of growth than seen in Q3, Q2, and Q1 when it was 21%, 44%, and 29% respectively. In fact, the expansion in the operating profit margin was largely the result of costs not having gone up as much as the sales. The total expenditure in the March quarter went up by just 5% y-o-y. While a smaller raw material bill — down 104 basis points y-o-y as a share of sales — helped businesses save on inputs, the expenses on employees too were up just 6% y-o-y, the slowest rise in at least four quarters. Again, the interest outgo too was the smallest in four quarters, up just 9% y-o-y while depreciation also rose at the slowest pace in many quarters.
The sluggish growth in the top line is an indication that not too many companies were able to sell big volumes. Moreover, it’s clear that not every business was able to earn better prices for its goods and services. With the rural economy yet to recover, several consumer-facing companies, especially fast-moving consumer goods firms, reported low volume growth. Analysts have pointed out that even in the urban markets the underlying demand for several categories of products, such as paints, remains weak. The weak revenues reported by quick service restaurants also points to weak demand. In the case of industrial goods, spreads in the steel business were subdued resulting in some pressure on the margins of steelmakers. Again, several cement manufacturers took price cuts in March, which hurt their realisations.
The good news is that producers of capital goods reported fairly strong order books suggesting that capex is picking up pace. Software services companies reported a set of numbers with revenue growth slowing in the wake of modest discretionary spends by clients. Although deal flows during the quarter were reasonably strong, the smaller hiring numbers indicate caution on the part of managements as they await better demand conditions. Banks continued to do well during the quarter cashing in on the good demand for loans, especially from individuals. While the higher cost of funds meant margins were slightly weaker, there were no signs of deterioration in asset quality. While loan growth is expected to taper off in the current year to levels of 13-14% from 16% in FY24, yields could remain elevated. Top line growth, would, therefore, continue to be strong.
Earnings upgrades, so far, have been few and far between. With the economy tipped to grow at a somewhat slower pace in the current year than in FY24, and competition becoming intense in many sectors, the Street is staying circumspect until there are clearer signs of a sustained demand recovery. Given how valuations are already very rich, with limited room for any disappointments, the caution is prudent.
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