India Inc’s performance in the June 2024 quarter has been disappointing to say the least. Among the larger companies, misses far outnumbered the positive surprises. While the subdued numbers have been attributed partly to a harsh summer and the general elections, it is evident that consumption demand remains weak and that the rural recovery hasn’t been as strong as was anticipated.
This is reflected in the muted growth (just 5-8% year-on-year) in revenues over the past several quarters. Companies have either not been able to push volumes because demand has been tepid or they have been unable to raise prices for fear of losing market share. This has been particularly true for the consumer goods space where even leading players have been unable to grow volumes meaningfully.
With the raw materials bill falling only slightly during the quarter — only 43 basis points (bps) compared with a much steeper drop in earlier quarters — operating profit margins (OPM) have been under pressure across businesses. At JSW Steel, for instance, the OPM contracted by a steep 350 bps driving down the earnings before interest, taxes, depreciation, and amortisation (EBITDA) by 22%. Again, at Asian Paints the margins contracted by as much as 422 bps y-o-y driving down the EBITDA by more than 20%.
Companies have been trying to rein in costs — the wage bill in Q1FY25, for example, went up by a relatively slower rate than in Q3 and Q2FY24.
In fact, the interest bill too hasn’t risen much. Despite this, the aggregate net profits for a sample of 2,347 companies (excluding oil marketing companies, banks, and financials) grew at 15% y-o-y, the slowest in at least four quarters.
As analysts at Motilal Oswal have said, the 4% y-o-y growth in net profits for the Nifty50 firms is the slowest since the June 2020 quarter when the pandemic had set in. To be sure India’s macroeconomic story remains strong and the gradual pick-up in private sector investment is expected to boost employment.
However, consumption demand has been weak for nearly two years now for several reasons including high joblessness and inflation. Demand for cars, which has been buoyant, is slowing and this could happen for homes too. Moreover, the slowdown in exports remains a big concern since it is a sector that employs large numbers.
Importantly, newer players and technologies are disrupting the business models of legacy players and have driven up competition across sectors. As such revenues are now distributed across a larger number of players in consumer-oriented sectors.
The good news is that software services firms have a more positive outlook on discretionary spends by clients and a few have upped their guidance. Analysts are not sure if there is a significant broad-based pick-up in spends because clients continue to focus on cost-saving initiatives, but they expect spends to start normalising early next year.
While banks have fared reasonably well, and asset quality has shown few worrisome signs, banks have been hiking loan rates to protect their margins as the cost of borrowings goes up. The concern is that at such high interest rates, demand for credit might be impacted. With numbers not living up to expectations, earnings have been downgraded for a large number of companies. While the festive season should boost demand, it’s not clear how India Inc. will fare in the rest of the year.