India Inc operating margins finally lookup

Big story for Indian companies in Q4FY23

With the results season over, what has been the big story of the quarter ended March 2023? There have been many data points that have helped the quarter numbers. For instance, cost of raw materials fell sharply in the quarter. Also, the consumer companies like FMCG and other sectors saw a revival in rural demand. That had appeared elusive even a quarter ago. Thirdly, interest cost which was putting pressure on net margins, has stabilized, although it is yet to appreciably come down. But the big story of the quarter was the sharp improvement in the operating margins of Indian companies. This has been largely driven by better gross margins and greater control over inventory costs. The revival in operating margins comes after 2 weak quarters. 

How did the margin numbers pan out?

A study done on the BSE-200 companies reveals that the overall top line of these companies had surged by 12.3% on yoy basis. This is the slowest growth in the last 3 years on a yoy basis, but the encouraging fact is the 7% sequential growth in sales, which hints at a revival in rural demand. The real story was in the profits. For instance, the net profits of this sample of companies grew 21.4% sequentially. That is the best growth in the last 18 months. Of course, this is largely driven by BFSI since industrials have grown at just about 2.3%, but growth is growth anyways and does not have any colour. Now comes the real story. The profit growth came from hard core improvement in operating margins which expanded 30 bps to 21.27% for the quarter.

Great sectors and not so great sectors

Which were the sectors that saw genuine improvement in the operating margins. Broadly, the big gainers were the banks and financials. A sharp spike in loan yields with the cost of funds not catching up created a sweet spot for banks. Net interest income (NII) expanded at the fastest rate and Net Interest Margins (NIMs) expanded to record levels for most of the private and public sector banks. The other sector that gained on operating margins was the auto ancillary and tyres sector. Sharply lower cost of rubber and carbon black helped immensely. However, some of the sectors also saw pressure on operating margins. Consumer discretionary, cement, retail and metals saw pressure on operating margins as input costs posed a challenge. 

Real story was in the gross margins

Most of the key industrial sectors saw a sharp bounce in gross margins, which actually hold the operating keys to the gross margins. Sectors like autos, FMCG, realty and Healthcare saw yoy improvement in operating margins. In most cases, it was about commodity costs stabilizing but in many cases, it was about companies deliberately tweaking the product mix in favour of higher operating margins. Debt levels also reduced as companies cut down on idle funds getting locked up in inventories. That has been made possible with the supply chain constraints reduced to a large extent. 

Are there any risks to the operating margin expansion story or will it continue in the coming quarter also? Most experts expect some more expansion in operating margins, although banks should see their NIMs either stabilizing or narrowing from current peak levels. But, there are a number of uncertainties in the global macros. For instance, the Fed is not yet done with rate hikes and that still opens up the US economy to a possible recession in the next few quarters. That would obviously have a negative impact on Indian corporate margins, as we saw in the last few quarters. The domestic story looks resilient, but global macros remain the X-factor for operating margins.

Content Source: Financial Express