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Companies are declaring results for the first quarter of Financial Year 2023-24 (Q1 FY24), providing a broad barometer of the macroeconomy. These results broadly showed that markets abroad are sluggish for the services industry, not to speak of merchandise products, domestic. They show that demand for consumer goods is recovering but slowly; commodity prices are falling, and there is interest pressure on corporations. However, the infrastructure sector is performing well.
Infosys, the information technology (IT) major, reported an almost 11 per cent rise in profit in Q1 FY24. However, it slashed its sale revenues outlook to 1-3.5 per cent in constant currency (excluding exchange rate fluctuations) for the entire financial year from the earlier estimate of 4-7 per cent. The company blamed spending cuts and clients delaying decisions for the revised outlook, marking the impact of a muted global macroeconomic environment on outsourcing services.
Besides specific expenses on the British Steel Pension Scheme, Tata Steel’s results reflected that Europe’s sluggish economy had pulled down steel prices. The Indian company reported a 93 per cent drop in consolidated net profit for Q1 FY24. Earnings before interest, taxes, depreciation and amortisation (Ebitda) was down around 60 per cent. T V Narendran, managing director of Tata Steel, said a sluggish global economic recovery is affecting commodity prices including steel.
Reliance Industries Ltd (RIL) results, too, showed the impact of commodity prices falling as interest pressures increase. The company reported an almost 11 per cent fall in net consolidated profit in Q1 FY24, the highest decline in the past 11 quarters. Consolidated revenue declined 5.3 per cent and Ebitda rose 5.13 per cent. The company’s finance costs increased 46 per cent due to higher interest rates and loan balances.
Companies trim outlook
The company's oil-to-chemicals (O2C) business was affected by a 31 per cent fall in crude oil prices. Revenue from this segment declined around 18 per cent.
However, RIL's retail arm -- Reliance Retail – posted a nearly 19 per cent rise in net profit in Q1 FY24, driven by grocery, consumer electronics, and fashion and lifestyle segments. Similarly, Reliance Jio Platforms recorded a 12.5 per cent rise in consolidated net profit. This meant that demand in digital and consumer segments is recovering.
Net profit at Hindustan Unilever (HUL) rose by eight per cent and sales by seven per cent, marking a slow recovery in demand for the company's products from a lower base last financial year. The company's volume sales growth rose just three per cent, the slowest in the past five quarters. HUL's results – a marker for consumer sentiment in the country –were modest and showed subdued demand and high inflationary pressure.
Larsen and Toubro (L&T) clocked a 46 per cent rise in net consolidated profit in Q1 FY24. This broadly indicated that the infrastructure sector, helped by the government’s push, is driving the economy.
Madan Sabnavis, chief economist at Bank of Baroda, said the corporate results do not give a sense of buoyancy in the economy and at best show stability.
"Last year we had seen good top line growth while the bottom line was compressed due to the rising input cost. This time with prices coming down, the top line has been impacted for manufacturing. At the same time we have no strong signs of recovery in demand and whatever is visible is limited to certain pockets," he said.
Sabnavis believed the pent-up demand phenomenon will not be there to the same extent this year and though it is seen in services, the same is not visible in manufacturing.
"There will be some pushback here. Corporate discourses still talk of premium products doing well and while some have said that they are going back to the earlier grammage or cutting prices, the impact is still to be felt," he said.
Export markets will be under pressure and the performance of services exports will not be replicated most probably and growth will be more modest, said Sabnavis.
Changing strategy
Anil K Sood, professor and co-founder of the Institute of Advanced Studies in Complex Choices, said the quarterly results of large corporations provide insights not only about business and economic performance, but also about the strategic choices that these firms are making.
If some of India’s largest companies are slowing down capacity expansion, reducing employee strength or are buying back their shares or are not borrowing to invest, it indicates that they expect the demand for their products and services to slow down.
Infosys has reduced its employee strength for two consecutive quarters (Q4 FY 23 and Q1 FY 24), which has happened just twice earlier: once during the pandemic and earlier during Q1 and Q2 of FY18, said Sood.
L&T’s announcement suggests that its shareholders are best served if the company buys back its stock and does not retain equity for investing in the infrastructure sector, he said.
"L&T’s first ever buyback was in 2018. Stock buyback is an appropriate strategy for IT services firms that have high margins and don’t need capital for growth."
L&T would buy back shares from retail investors at a price which is Rs 351.1 per share higher against the share price of Rs 2679.90 apiece on BSE (at Monday’s close).
The revenue of commodity producers like RIL is impacted by global and domestic demand and it is also a function of oil prices and rupee exchange rates, Sood said. Reduced oil prices or rupee appreciation slows down producers' top line growth.
Demand for consumer products has not recovered to pre-pandemic level even during the last quarter, as HUL has reported, Sood said.
Economic recovery
In an earnings call, the company has mentioned that if it were to look at market growth on a two-year CAGR basis, total volume growth is still marginally negative, with rural volumes declining at 4 per cent. The company also said that volumes will recover gradually due to high levels of cumulative inflation that consumers are facing and the fact that consumption habits typically recover with a lag.
'In summary, the last quarter’s results and the management narratives suggest that the probability of the Indian economy moving to a cross-sector secular growth trajectory is still low," Sood said.
Nilaya Varma, co-founder & chief executive officer of Primus Partners, said the economy is making a K-shaped recovery. The rural economy is coming out of the pandemic-induced slowdown and benefiting from higher food inflation and government support seen over the past few years. However, urban demand, especially in the technology sector, has moderated.
High interest rates globally and in India are shaping private investment. "This has resulted in companies in sectors like infrastructure benefiting from the high government spending while those dependent on private consumption, especially urban middle class and private investment, are lagging behind," said Varma.
