Falling costs power Q4 earnings after two quarters of weakness

There are now visible benefits of corporates gaining from falling raw material, freight and energy costs, leading to improved profitability for manufacturers. Banks and financial services companies, however, continue to remain key earnings drivers like in the previous two quarters.

Data compiled by Mint for 3,535 companies, including banking and finance, showed net profit grew 18% from a year ago in the March quarter. This marks a rebound from a 1.2% growth in Q3, and an 8.6% drop in Q2.

Profit in the fiscal fourth quarter rose 29% sequentially for 3,003 companies though it grew at a modest 2.4% from a year ago if banks and financial companies are excluded from the total sample, indicating banking and financial services remained key growth drivers. This, however, marked a sharp improvement compared to the 14.8-24.5% profit decline seen in the previous two quarters compared to a year earlier.

Growth was boosted by improved operating performance. Profit before interest, depreciation and taxes, which fell 1.6-8.1% in the past two quarters, grew 6% from a year earlier in Q4.

“One key trend that has continued through the year was banks accounting for the bulk of the profit growth," said Sushant Bhansali, chief executive, Ambit Asset Management.

While Q4 FY23 earnings season saw Nifty register 14% net profit growth, Nifty earnings growth excluding banks would have stood at 6%, he said. On the other hand, metals, and oil and gas continued to disappoint and excluding these, Nifty earnings growth stood at 23%, added Bhansali.

The March quarter earnings season, Bhansali said, saw Nifty companies clock net sales and Ebitda growth of 9% and 16%, respectively. Ebitda stands for earnings before interest, taxes, depreciation and amortization.

Profit received a major heft as commodity prices fell sharply from the peaks seen in 2022. This, however, caused earnings volatility for commodity producers who were laggards among Indian corporates in Q4.

Notably, the corporate performance during Q4 was better than expectations.

“Despite having a high base, on an overall basis, the Q4 numbers beat estimates by a good margin," said Deepak Jasani, head of retail research at HDFC Securities Ltd. While Q4 FY22 numbers reflected topline growth due to high-cost pass through effect, some volume growth resumption along with cost reduction was seen in Q4 FY23, added Jasani.

The momentum turned positive in the second session of the result announcements, led by financials, and actual earnings growth of the Nifty 50 index came better than expected, said Vinod Nair, head of research at Geojit Financial Services.

Apart from the banking sector and non-bank lenders, automobile companies contributed well to the earnings growth. As per Motilal Oswal Financial Services, while auto and BFSI were the key growth drivers with 127% and 64% earnings growth from a year earlier for their coverage universe, respectively, global commodities such as metals and O&G (oil and gas) were the top drags with profit falling 46% and 20% respectively from a year ago.

Marginal upsides were also seen in telecom, fast-moving consumer goods (FMCG), and infrastructure, Nair said. The key laggards included IT, chemicals, and cement, followed by marginal setbacks in pharma and power, said Nair at Geojit.

Engineering, tyres, hotels, large financial firms and refining companies also did well in Q4, aided by respective sectoral tailwinds. Commodity consumers including consumer staples showed signs of positive turnaround. However, oil exploration, steel, and cement (especially on a year-on-year basis) did badly, said Jasani.

According to Bhansali, the other key trend was margin expansion and the continued slowdown in domestic consumption.

Analysts at Kotak institutional Equities also said “consumption demand continues to be muted and there is still some degree of uncertainty about the monsoons".

In addition, investment demand is showing some signs of a slowdown, with a sharp decline in capital expenditure by states, Kotak analysts said. They expect the aggregate net profit of Nifty-50 Index to grow 12.6% in FY24 and 15.2% in FY25.

Strong upgrades are from financials and auto, followed by marginal upgrades in infrastructure, cement, and capital goods, said Nair. The downside (downgrade) is noticed in IT, pharma, and metals.

However, in a nutshell, the overall effect on the FY24 forecast is minimal due to recessionary risk from the US and Europe, depicting a likely slowdown in volume and revenue growth, said Nair. The market expects 18% earnings growth for the Nifty 50 index in FY24, which seems higher due to a mixed outlook on external demand, added Nair.