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March quarter earnings show green shoots, monsoon key for consumption revival

Aggregate net profit of Nifty companies grew 16 percent while net sales jumped 13 percent in the March quarter. Manufacturing companies fared well, the ones exposed to consumption and outsourcing faced demand-related challenges

Published: Jun 1, 2023 04:13:19 PM IST
Updated: Jun 1, 2023 06:32:09 PM IST

March quarter earnings show green shoots, monsoon key for consumption revivalAggregate net profit of Nifty companies, excluding the financial sector, improved 7 percent year-on-year in March quarter. This compares to a nil growth in the preceding three months and a 16 percent growth in the March quarter of FY22. Image: Shutterstock
 
Even as earnings of Indian companies remained skewed in the three months ending March, easing global supply chain issues and inflationary pressures cooling off across the commodity basket helped companies manage their margins. However, persistent slowdown in consumer demands, especially in rural India, remain a worry as revival hinges on a good monsoon. Companies in the financial sector continued to show better performance, while those in oil & gas and metals lagged in the January to March period.
 

A Forbes India analysis of earnings showed that aggregate net profit of Nifty companies, excluding the financial sector, improved 7 percent year-on-year in March quarter. This compares to a nil growth in the preceding three months and a 16 percent growth in the March quarter of FY22. However, if we further tighten the universe and exclude companies in oil & gas and metal, the numbers look better: Nifty aggregate net profit climbed 30 percent year-on-year in March quarter compared to 31 percent in Q3FY23 and 19 percent in March quarter of FY22.
 
Overall, the aggregate net profit of Nifty companies grew 16 percent while net sales jumped 13 percent in the March quarter, showing a decline. Net sales climbed 18 percent in the December quarter while it rose 24 percent in Q4FY22. The analysis is based on data provided by Motilal Oswal Financial Services.

March quarter earnings show green shoots, monsoon key for consumption revival“We would categorise the March quarter FY23 earnings as broadly in line versus muted expectations but strong on a regional basis, despite macro-headwinds. While companies exposed to the manufacturing side of the economy fared well, the ones exposed to consumption and outsourcing faced demand-related challenges,” says Trideep Bhattacharya, CIO-Equities, Edelweiss Mutual Fund. He adds that weakness across most consumption categories continued in Q4, although lending remained robust.
 
Others concur. According to Gautam Duggad, head of research-institutional equities, Motilal Oswal Financial Services, earnings performances for companies under their coverage and Nifty were lopsided and led by a few heavyweights in the March quarter. “Five companies within our coverage (SBI, Tata Motors, BPCL, IOC and Reliance Industries) contributed 83 percent of the incremental year-on-year earnings. Similarly, within Nifty, five companies (SBI, Tata Motors, BPCL, Reliance Industries, and Axis Bank) contributed 96 percent of the incremental YoY accretion in earnings,” he explains. 

Duggad believes that though Indian economic conditions and corporate performance remains relatively healthy, consumption slowdown, inflationary environment and global slowdown (impacting exports) are key near-term concerns. Input cost inflation are off the high in 2022 but still remains high, which would take couple of quarters before completely normalising.

March quarter earnings show green shoots, monsoon key for consumption revivalAlso read: Misplaced exuberance drives Indian stocks as investors navigate 'hard times'
 
Analysis showed that the Ebitda (earnings before interest, taxes, depreciation, and amortisation) of Nifty companies were steady after picking up in the December quarter. It grew 12 percent YoY in the March quarter compared to 13 percent jump in the previous quarter and 9 percent in the September quarter. The Ebitda of the same set of companies, however, was at 17 percent growth in the March quarter of last fiscal. Excluding financials, the Ebitda margins climbed 19.2 percent in Q4FY23, from 18.7 percent in previous quarter. It was at 19.9 percent in March quarter of FY22.

“For Nifty companies, on the aggregate level, the March quarter results are largely in line with our expectations. The outperformance is driven by a strong growth in the banking sector whereas metals and oil & gas sectors turned out to be a drag on the aggregate net profits. The quarterly results indicate margin pressure and signs of slowdown in consumer spending going ahead. However, on the brighter side, the commodity prices are easing out and the commentary on margins and growth outlook is positive across many sectors,” says Gaurav Dua, head, capital market strategy, Sharekhan by BNP Paribas.

Who is the best and worst?

Banking, financial services and insurance (BFSI) and Information Technology (IT) contributed to more than half of the profit pool. While the share of oil & gas in the net income inched up sequentially, the fall in the share of the IT sector reflected the impact of the slowdown as the sector is most exposed to the developed markets economies, according to analysis by Hitesh Suvarna, analyst, JM Financial Institutional Services.
 
March quarter earnings show green shoots, monsoon key for consumption revivalIt was a big mixed performance by the IT companies in Q4FY23. Tier-1 IT firms reported muted revenue growth and moderate margins, while tier-2 companies outpaced with stronger revenue growth. Tata Consultancy Services (TCS) said the near-term uncertainty is more pronounced in the US region, while a meaningful demand recovery is seen in the UK and Europe regions.
 
Infosys is optimistic about the demand recovery in the second half of FY24, while the margin is expected to be under pressure. It has given revenue guidance of 4-7 percent (YoY) growth in constant currency terms and EBIT margin guidance of 20-22 percent for FY24. “The IT Services sector started the result season with negative surprise in terms of lower-than-expected growth outlook in FY2024. The upstream oil & gas major like ONGC also reported results that are quite weak and below expectations. In the auto sector, the companies in the EV segment seem to be grappling with prolonged delay in subsidy payments under FAME (Faster Adoption and Manufacturing of Electric Vehicles) while the innerwear companies seem to be struggling with the build-up of inventory in the system. On the positive side, the order booking for engineering and infra companies have been quite healthy across the board. The banks also reported record profits with healthy growth in core business and lower provisioning requirements. Some of the financials like Power Finance Corporation (PFC) surprised positively with strong recoveries and write-back of provisions boosting the net profits,” says Dua. 

Even in an inflationary environment, FMCG companies reported volume growth while there was downtrading only in specific categories like tea. “We expect the trend of easing inflationary pressure to play out in Q1FY24 as well, benefitting FMCG and autos,” says Suvarna.
 
March quarter earnings show green shoots, monsoon key for consumption revivalFor consumer-focussed companies like FMCG, price hikes have been realised and commodity costs have stabilised or even declined in some cases, and there has been an improvement in the product mix for a few companies, according to analysts. Management commentary from most of the companies suggested that ad spending has returned to normal levels and companies will refrain from investing in advertising and promotion going forward.
 
“The performance of rural India remained weak; however, management commentary of companies suggested there were signs of improvement with the reversal in the declining volume trend during the quarter. This serves as a silver lining for the year, instilling hope for improved conditions and increased consumer activity in rural areas,” says Duggad. Factors such as a normal monsoon and a low base of rural growth could lead to further improvement in the future.
 
Bhattacharya also adds that while we witnessed broadbased weaknesses across consumption, it was particularly noticeable in companies that are exposed to rural sector, while urban consumers were relatively better off. “We noted that the near-term outlook of the rural-focussed companies were also weak due to the feared impact of the El Nino on the upcoming monsoon season over the next few months. While outsourcing companies were impacted by a weak global demand environment, this was accompanied by strong investment demand as reflected in strong earnings from industrials/capital goods companies,” he says.  

Also read: India Inc's limping earnings recovery in March quarter likely to be lopsided

Earnings projections

“Earnings have been growing at a very healthy rate for past three fiscal years after a phase of muted growth in earnings from FY2014 to FY2020. Over the last three years, Nifty earnings per share (EPS) has moved up close to Rs820-825 per share in FY2023 as against Rs444 per share in FY2020. Over the next two years also, the consensus estimates show expectation of mid double digit growth in net earnings which would take Nifty EPS to Rs1,070-1,080 range by FY2025,” explains Dua.
 
March quarter earnings show green shoots, monsoon key for consumption revivalDuggad expects the Nifty EPS to grow 20 percent in FY24, forecasting FY24 earnings growth to be led by BFSI, oil & gas, metals and automobiles, as the four sectors are expected to contribute 82 percent of the incremental earnings to Nifty. The top earnings upgrades in FY24: Tata Motors (13 percent), Bharti Airtel (8 percent), Bajaj Auto (7.3 percent), Divi’s Lab (7 percent), and Hero MotoCorp (5 percent). The top earnings downgrades in FY24 are ONGC (-16 percent), UPL (-13 percent), Grasim Industries (-11 percent), Hindalco (-9 percent), and Coal India (-8 percent).
 
At current valuation Nifty is trading at price-to-earnings (PE) 18.6 times, Suvarna sees limited downside risk. However, he expects earnings to grow at a more realistic rate of 13-15 percent in FY24. “We are cognisant of the risk of adverse weather conditions, which could disrupt the demand environment, especially the rural economy,” Suvarna says.
 
Recovery in domestic consumption, inflation and interest rates, monsoon trends, election led spending and uncertainties on the geopolitical front are key factors analysts will watch out in FY24.
 
According to Bhattacharya, India’s macroeconomic outlook has improved with peaking inflation and comfortable inflation trajectory and an improving external sector outlook but growth outlook continues to be muted in near term.

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