As Q1 profit growth retreats to single digits, can India Inc. hold its head above water?

While revenue growth was still one of the best in a year, the string of consistent sub-10% figures in this period could keep India Inc. tense. A relatively higher base in the previous year also hurt net profit growth. Other factors such as rising input costs due to higher global commodity prices, weak global demand and a sluggish rural consumer market were also a drag.

The performance got a fillip from the banking, financial services, and insurance (BFSI) sector, excluding which net profit contracted 3.3% from a year ago—the second consecutive quarter of decline—while revenue grew almost 6%.

Madan Sabnavis, chief economist at Bank of Baroda, said the absence of demand revival, inflation, and limited government expenditure affected sales and consumer demand. He expects an improvement by the December quarter as demand recovers and inflation eases. A likely better monsoon harvest should also help lift rural consumption.

The net profit of large companies declined after a downward trend for at least a year, while it was the mid-sized players (revenue between ₹1,000 crore and ₹10,000 crore) that led both profit growth and revenue growth.

Also read: Data dive: Small firms punch above their weight, but the party may not last

 

Mixed bag

A sectoral analysis, too, uncovers a diverse earnings picture. Of the 18 broad sectors tracked by Mint, seven—media and entertainment, oil and gas, power, chemicals, agriculture and allied sectors, metals and mining, and construction—posted a decline in aggregate profit from a year ago.

Shweta Rajani, head of mutual funds at Anand Rathi Wealth Ltd, said elevated global oil prices amid geopolitical conflicts will continue to influence the oil and gas sector’s performance. 

However, she sees potential for sectors such as metals and mining, and agriculture to catch up, given the substantial allocations made to these sectors in the latest government Budget.

Eight of the 18 sectors reported strong double-digit profit growth. Textiles, pharmaceuticals and healthcare were the primary growth engines for corporate India's June-quarter earnings. Other sectors with a strong rise in profits were consumer durables (57%), capital goods (55%), infrastructure and engineering (39%), auto and ancillaries (34%) and BFSI (22%).

 

Also read: India's consumer goods sector longs for a rural revival

 

Cost pressures?

The quarterly results indicated a slight easing of expenditure pressures relative to the topline. The aggregate expenditure of the sampled companies as a share of revenue hit its lowest in 15 quarters, at 69.1%, down from 70.1% a year ago and 70.2% in the preceding quarter.

Specific expense heads showed different trends. Employee salary costs as a proportion of revenue remained little changed at 8.6%, consistent with previous quarters.

A more granular analysis of specific service-line providers like BFSI and information technology (IT) reveals that employee costs as a share of revenue fell to their lowest in over four years (to 9.8%) for BFSI, while experiencing a modest slowdown (from 49.3% a year ago to 48.3%) for IT services firms.

However, input costs exerted mild upward pressure: raw material expenses accounted for 37.4% of revenue, up from 36.4% a year ago.

 

Also read: The two faces of India Inc.'s Q3 growth story

 

Margin relief

Despite lacklustre earnings growth, operating profit margins improved somewhat. The combined operating profit of the sample as a share of revenue rose from 29.9% to 30.9% over the past one year. On the other hand, net profit margins (or net profit as a share of revenue) slowed, dropping by 42 basis points to 10.9% from a year earlier. However, it was up 20 basis points from the March quarter.

“The marginal increase in aggregate profit margins is likely due to improved operational efficiency, including better cost management by companies," said Anand Rathi’s Rajani. “Other factors such as one-off gains, currency fluctuations, premiumization, lower cost of capital, and enhanced pricing power also likely played roles in increasing profit margins." 

While the June-quarter results reflect ongoing challenges, they also highlight the resilience and adaptability of Indian businesses. The varied performance across sectors and company sizes underscores the importance of a diversified approach when assessing India's corporate landscape.