Q2 earnings: Corporate profits decline, a first in nine quarters

The post-Covid boom in corporate earnings, as expected, seems to have ended, at least for now, as companies saw margins and profits shrink in the July-September quarter (Q2) of FY23, or 2022-23.

Notably, this is the first decline in India Inc’s quarterly earnings since the April-June 2020 quarter, which was impacted due to the outbreak of Covid-19.

The Q2 earnings were adversely affected by the higher cost of raw materials and energy, besides a reversal in the interest rate cycle, resulting in a higher interest expense for companies in the non-financial sectors. India Inc’s revenues, however, continued to grow in healthy double digits thanks to higher raw material prices and inflation, which boosted price realisations across sectors.

The combined net profit of 2,725 listed companies across all sectors was down 6.3 per cent year-on-year (YoY) in Q2 —the first contraction after eight consecutive quarters of YoY growth.

In comparison, corporate earnings were up 22.3 per cent YoY in Q1 of FY23 and they were up 37.8 per cent YoY in the year-ago period.

The companies in this sample reported a combined net profit of Rs 2.06 trillion, down from Rs 2.20 trillion a year ago and Rs 2.08 trillion in the previous quarter.

In comparison, the combined net sales of all listed companies in this sample were up 25.9 per cent YoY in Q2 to Rs 29.3 trillion.

However, the corporate earnings would have been even worse if not for the big jump in those of the banks in the second quarter.

The combined net profit of 31 listed banks in this sample was up 54.8 per cent YoY to a record high of Rs 60,600 crore in Q2, up from Rs 39,150 crore a year ago and around Rs 45,600 crore in Q1 of FY23.

Banks benefited from higher interest rates on loans to customers and faster growth in credit. Their gross interest income was up 18.5 per cent YoY in Q2, the best in at least the past four years.

Non-bank lenders and insurance companies -- finance companies in short -- performed better and their combined net profit was up 13.6 per cent YoY to around Rs 22,750 crore in Q2, up from around Rs 20,000 crore a year ago but down marginally from around Rs 23,250 crore in Q1 of FY23.

It was, however, a tough quarter for non-financial firms with a sharp decline in margins and profits due to the combined effect of higher input as well as finance costs.

The combined net profit of the companies excluding that of banks, financial services, and insurance (BFSI) as well as stock-broking was down 23.6 per cent YoY in Q2, their worst showing in nine quarters.

In comparison, their combined earnings were up 41.2 per cent YoY in the year-ago quarter and were up 10.8 per cent YoY in Q1 of FY23.

The non-BFSI companies reported a combined net profit of Rs 1.23 trillion in Q2, the lowest since the September 2020 quarter.

This is down 35 per cent from the record high net profit of around Rs 1.9 trillion in the March 2022 quarter (Q4 of FY22).

The decline in earnings was largely led by oil and gas, and mining and metal companies while other non-financial segments did relatively well, thanks to gains from higher volumes.

A few also benefited from the sequential decline in commodity prices.

The combined net profit of non-financial companies’ excluding oil and gas, and mining and metals was up 6.2 per cent YoY in Q2 to Rs 98,657 crore in Q2.

Their earnings were, however, down 1.4 per cent sequentially from Rs 1 trillion in Q1 of FY23 and they were nearly 15 per cent lower from the record high earnings of Rs 1.16 trillion in Q4 of FY22.

On the top line, companies across sectors reported high double-digit growth in net sales on a YoY basis with oil and gas companies (net sales up 46.8 per cent YoY) and automobile makers (up 35.8 per cent YoY) leading the charts.

The numbers, however, suggest a moderation in revenue growth compared to the previous quarters.

The combined net sales of all listed companies in our sample were up 25.9 per cent YoY in Q2, having moderated from 37.7 per cent growth in Q1 of FY23.

Similarly, the combined net of companies ex-BFSI was up 28.6 per cent YoY in Q2 of FY23 compared to 46.1 per cent YoY growth in Q1 of FY23 and 32.5 per cent YoY growth in Q2 of the previous financial year.