Sluggish revenues temper galloping net profits for India Inc in Q1

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Following their performance in Q1 of the current financial year, you can’t blame India Inc if it does not know whether to laugh or cry. Business without profits is a non-starter. But a sharp rise in profits without concomitant growth in revenues can also trigger frowns and gloom in happy corporate faces. Number crunching of the Q1 results of FY24 threw up a cumulative dream rise of 39% in net profits and a paltry revenue growth of 6.2% of a large sample of 3,901 companies, The Economic Times has reported.

The robust growth in net profits was piloted mainly by declining input costs. The BFSI sector comprising the banking, financial services and insurance put on a dazzling bottom line display that helped the entire business sector achieve splendid numbers in the bottom line and also supported topline aggregates.

The difference in the performance of the top and bottom lines was accentuated by the fact that while the growth in profits in the April-June period was the highest in six quarters, the growth in revenues was the poorest in at least nine quarters.

India Inc displayed poor performance at the top line but far better performance on the margin front, said Deepak Jasnani, retail research of HDFC Securities.

“Corporate earnings were in line with our estimates. Our coverage universe recorded the highest growth in the last eight quarters, fuelled by domestic cyclicals such as BFSI and automobiles,” said Gautam Duggad, institutional research head of Motilal Oswal Financial Services.

“As inflationary pressures eased on a YoY basis, sellers passed on the benefit of lower prices to customers and hence top line growth was weak,” remarked Jasnani. He also added that higher ‘other income’ boosted the growth in net profit.

The report said the proportion of other income in the sample’s total income went up from 3.3% in Q1 of FY23 to 4.3% in Q1 of FY24.

The BFSI sector reported a sizzling 52.2% growth in net profit compared to Q1 in FY23. Faster credit offtake, healthier net interest margins and power provisioning led to this performance.

The contribution of the BFSI sector was so strong that without it, the revenue growth of the sample of 3,901 companies (compared to Q1 a year earlier) would have decelerated to 2.3%. Profits, too, would have slowed down to 33.6%.

The effect of the easing input costs leading to the spectacular rise in net profit for the companies excluding the BFSI sector is evident from the fact that the ratio of raw material cost to revenue went down by 3.3 percentage points year-on-year (and reached 36.4%).

Jasnani pointed out that along with the BFSI sector, oil exploration, refining, automobiles and capital goods fuelled the fattening of profit margins. Metals, chemicals, cement and IT services played spoilsport.

However, with the rise of possible headwinds in the coming quarters, the picture might remain too rosy in the next few quarters as well.

“Given the challenges to growth for export-oriented companies, aggregate earnings growth might somewhat taper off,” warned Jasnani. Commodities in deflation, slackening exports and consumption could bring earning estimates under pressure. Duggad was bullish on the markets but tempered his optimism with a possibility of higher crude prices and lukewarm growth in the major economies abroad.

Duggad said that their FY24 growth estimate of Nifty EPS stood around 20%. He also pointed out that this number was very healthy since it followed annual EPS rise of 22% in the FY20-23 period.