Growth moderation

Lower commodity prices can help protect margins

Corporate results for the April-June quarter of 2023-24 (Q1FY24) suggest a moderation in revenue and profit growth. Corporate revenues and profits have tapered off compared to the previous quarter (Q4FY23), though there has been impressive year-on-year (Y-o-Y ) growth. Most of the profit growth is contributed by banks, non-banking financial companies (NBFCs) and refineries. There has been a sharp moderation in crude oil and gas prices compared to a year ago, when fears of supply disruption due to the Ukraine war had led to a spike. Lower energy prices boosted profits for refiners. Refineries have doubled profits on a Y-o-Y basis. Banks and financial services have benefited from passing on interest rate increases in a lagged manner, boosting net interest margins. Interest costs are still rising, but the pace of the rise has moderated. Going by quarter-on-quarter (Q-o-Q) numbers, raw material costs are moderating. Fuel costs are down as well, and rising employee-related costs suggest businesses are hiring on a net basis.

If volatile sectors like refineries and financials are excluded, the other sectors have seen 11.5 per cent growth in revenue on a Y-o-Y basis, and 5 per cent drop on a Q-o-Q basis. Their operating profits have grown 8.3 per cent Y-o-Y and dropped 5 per cent Q-o-Q. Profit after tax (PAT) is up 9.6 per cent Y-o-Y and down 10.7 per cent Q-o-Q. That’s the sign of a sequential slowdown. Smart investors will allow for the seasonal impact of heavy rains, which adversely affected the construction industry, resulting in poor offtake for cement and steel. Apart from seasonal factors, industrial metals suffered from low global demand, which led to a moderation of prices across iron, copper, aluminium, zinc, and lead. Taken together, however, the results of 525 listed companies show that revenues are up 8 per cent Y-o-Y, with 33 per cent higher operating profits and 35.5 per cent rise in PAT. However, on a Q-o-Q basis, revenues are down 2.5 per cent, operating profits are up 7 per cent, and PAT is up 5 per cent. Banks’ PAT has grown 48 per cent Y-o-Y, and 28 per cent Q-o-Q, while refineries have seen PAT growing 199 per cent Y-o-Y, and 11 per cent Q-o-Q. 

In terms of consumer-oriented sectors, fast-moving consumer goods have seen moderate growth, both on a Y-o-Y basis and sequentially. Advisories suggest rural demand is still weak. However, another key consumer-driven sector, automobile and the associated ancillary supply-chain, has seen encouraging growth. Tata Motors has managed a turnaround. A good monsoon could accelerate consumption demand across the hinterland in Q2FY24. The biggest disappointment has come from the information technology (IT) sector, which has reported some of the worst results. In constant currency terms, the IT software sector’s revenue has grown 11 per cent, operating profit has risen 11 per cent, and PAT has been up 10.8 per cent on a Y-o-Y basis. In Q-o-Q terms, the sector has seen revenues declining 0.2 per cent, operating profits falling 4 per cent, and PAT contracting 5 per cent. Guidance and advisories across the sector indicate that the global demand for IT services may remain downbeat through FY24.

Overall, although many big public-sector undertakings are yet to report their results, the trend seems clear. Profits are decelerating and revenue growth has also slowed on a Q-o-Q basis. Moderating raw materials costs could help maintain margins. A good monsoon might boost consumption demand in the hinterland.