Q1FY24 profits put up good show, sales falters

Macro picture of Q1FY24 results

The expectations were quite tepid ahead of  Q1FY24 results in India. Indian companies were expecting pressure in terms of weak global demand, tepid rural demand as well as a gradual rise in inflation. However, the numbers at a macro level appear to be good on the profit front while it has been rather tepid on the sales / revenues front. Here are some key points to note in terms of broad macro level Q1FY24 results of Indian companies. 

• Overall Revenue growth for Q1FY24 was 6.5%. This is much lower than the 3 sequential quarters when sales revenues grew by over 15% in each of the previous quarters. Also, most of the top line growth came from the BFSI (banking, financial services, insurance) space. Just to test our hypothesis, if you look at revenue growth (ex-BFSI), then it is just 1.3% for Q1FY24. This is in contrast to revenues (ex-BFSI) growth of 12.3%, 18.3% and 30.9% in the previous 3 quarters, starting the latest quarter.
  
   
• Let us now look at the PAT (profit after tax), also called the bottom line for Q1FY24. Overall, the PAT growth in the quarter was an imposing 50.3% yoy. This is sharply better than the PAT growth rates of 25.4% and 5.7% in the previous two quarters, starting the latest quarter. How does the picture change if you exclude BFSI. Banks have been big contributors to profits, the profit growth does dip to 44.8% for ex-BFSI, which his still robust. This compares with 9.9% in the previous quarter. The two quarters before that saw fall in net profits (ex-BFSI) due to higher cost of funds amidst rising interest rates. PAT has benefited from lower interest costs and also lower input costs.
  
   
• The picture of falling costs become more apparent if you compare the key profitability margins in the latest quarter with the 3 quarters prior to that. For example, gross margins at a product level stood at 48.7% in Q1FY24. Over the last 3 quarters, the gross margins have improved by more than 500 basis points and the improvement has been steady. Also, if you look at the EBITDA margins for the ex-BFSI stocks, it has improved over the last 3 quarters by 440 basis points to 16.6% in the Q1FY24 quarter. Clearly, a sharp fall in cost of commodities appears to have boosted profits in Q1FY24.

The results season is not over and this study only considers over 1,500 companies But ,these are the heavyweights and carry substantial clout in the market and market cap weight in the market. Hence, their performance is largely representative of India Inc.

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Higher base impacts revenue growth, not profits

In the previous year, the earnings and top line were growing on a COVID base. Hence the top line growth had looked very impressive. However, this year that advantage was missing. To add to that, global sales have been weak across most sectors while rural sales are just about showing green shoots recovery amidst delayed monsoons, lower kharif output and rising rural inflation. That is why for the sample of companies considered, the revenue growth has tapered to a level of 6.5% on a yoy basis in Q1FY24, compared to 20% plus growth in the previous two quarters. 

However, what the quarter has seen in the form of tapering of revenues has been more than compensated by robust profit performance. Profit growth has been robust at 50% for the population overall and over 44% for the ex-BFSI companies. However, if you look at the margins of non-BFSI companies, that is where the real action is. It is not just the gross margins and the EBITDA margins that have expanded, as explained earlier. Even the net margins or PAT margins expanded by 303 basis points in Q1FY24 to 10.6%, largely on the back of a sharp fall in commodity prices globally leading to lower costs.

Sectors driving the Q1FY24 narrative of India Inc

There are no prices for guessing, but banks continue to flatter the India Inc narrative in the latest quarter. It matters due to the weight of over 37% that BFSI has in the Nifty. Here are some major points to keep in mind at a sectoral level.

• The Indian banks continue to report strong topline growth, largely on the back of rising net interest income (NIIs). Banks sitting on higher NIMs (net interest margins) due to the yield on loans growing faster than the cost of deposits. However, with the RBI likely to turn hawkish, the story could change for the banks in the coming quarters.
  
   
• Refining has not been too positive, especially with the falling crude prices in the previous quarter, when crude had touched a low of $71/bbl. As against windfall gains on refining margins last year, refineries are reporting more normalised growth. However, oil marketing companies did report flattering numbers on the back of weak crude prices.
  
   
• Autos have been the stars of the last few quarters. They literally drove discretionary growth, with a strong order book position. Also, their bargaining power allowed them to increase the average selling prices, Export sales continued to be under pressure, although the rural sales have been much better than expected.
  
   
• The FMCG sector had some reasons to celebrate in the latest quarter, Q1FY24. It saw 9.4% top line growth, which is much lower than the double-digit growth in the last few quarters. That was because, volume growth was offset by price adjustments in a highly competitive scenario. However, bounce in rural volume was perceptible.
  
   
• On the two kings of infrastructure space, the growth in the cement companies eased to 12% while the steel sector achieved 6% growth yoy helped by a price rebound. Margins gained from lower commodity prices globally, but most of these infrastructure companies are investing heavily in capacity creation and that is constraining margins. 

Some headwinds in the horizon

Going ahead, the road could be a more challenging. The fact that gross margin expansion was the driver means the boost is coming from prices and not volumes. That is normally not a sustainable scenario. On the positive side, the rural volumes are gaining strength as indicated by commentary across sectors, but it remains to be seen how rising inflation in rural India could impact this enthusiasm. Inflation and costs remain the key issue.

A major driver was capping of interest costs after the RBI paused. However, interest coverage is still lower at 5.4X, compared to 6.2X last year. Rate hikes could be a concern for India Inc.