Increasing interest costs

Corporate results indicate improving demand

The Q3 FY23 (October-December 2022-23) results of 3,152 listed companies with a minimum revenue of Rs 1 crore indicate that rising interest rates are hurting margins and growth momentum is slowing. But there are signs of improved private consumption and enhanced demand for bank credit. The industrial metals cycle was down, while oil and gas refiners remained under pressure. Net sales were up year on year (YoY) 17.4 per cent for the entire sample, and earnings before interest, taxes, depreciation, and amortisation (Ebitda) increased 10.6 per cent. However, the operating margin fell to 22.7 per cent from 24.1 per cent a year ago. Profit after tax (PAT) was up 3.8 per cent. Bank credit expanded 25 per cent YoY, and non-interest banking income was also up 14.7 per cent.

If volatile sectors like oil and gas, and banking and non-banking finance were excluded, net sales were up for the rest by 15 per cent. Ebitda was up 1.24 per cent with the Ebitda margin, at 15.9 per cent, sliding 214 basis points. Interest costs were up 23 per cent for the entire sample and 20.7 per cent if financials and oil were excluded. Profit after tax (PAT) for non-volatile sectors was down 6.8 per cent YoY. Typically, fast-moving consumer goods (FMCG) and automobiles indicate consumption demand, with highest personal vehicle sales occurring during this festival period. FMCG sales were up 14.7 per cent and PAT for the sector expanded 24.8 per cent. Automobile sales were up 23.7 per cent, while PAT increased 169 per cent. The improvements were largely due to a turnaround in Tata Motors (PAT of Rs 2,958 crore vs losses of Rs 1,516 crore a year ago) and Maruti Suzuki (PAT of Rs 2,392 crore vs PAT of Rs 1,042 crore a year ago). So private consumption seems to have improved.

The capital goods sector reported a 13.9 per cent rise in sales and 10.5 per cent expansion in PAT, which may indicate improving corporate investment, taken in tandem with the banking numbers. Cement delivered a 14 per cent rise in sales but PAT declined 38 per cent because input costs rose and realisations dipped. Health care saw mid-teens improvements in sales and single-digit gains in PAT as it transitioned to post-Covid. Pharmaceuticals aggregated a 10 per cent rise in revenues but PAT fell by 8 per cent. The IT sector delivered a 20 per cent expansion in constant-rupee revenues but margin pressures translated into only an 11 per cent rise in PAT.

The real earnings disappointments were in the metals and mining sectors, where the cycle turned down due to low global growth. Steel producers saw a 3 per cent rise in revenues but PAT fell by 84 per cent. The non-ferrous metals sector saw a similar 3.3 per cent rise in sales but PAT fell by 47.5 per cent. The mining sector delivered a 6 per cent rise in revenues, and only a 3 per cent rise in PAT. Interest costs rose over 30 per cent for all these sectors. Refineries stayed under pressure with interest costs up 55 per cent, and PAT down 37 per cent due to elevated crude oil and gas prices. Overall higher interest rates and inflation are cause for concern but on the positive side, private consumption and corporate investment may finally be pulling out of the Covid trough.