Clipped from: https://www.thehindubusinessline.com/opinion/editorial/for-companies-input-cost-pressures-ease-but-business-growth-uncertain/article66482213.ece
While some sectors may do well, especially in services, slowing consumption caused by RBI’s rate hikes will pose a challenge to most others
A difficult global environment will make companies turn their focus on controlling costs to protect margins, rather than embark on ambitious capital investments. | Photo Credit: VELANKANNI RAJ
Earnings of the initial set of companies that have declared their third quarter earnings leave some room for optimism. Companies have managed to post healthy growth in profits despite muted revenue growth. But India Inc. will have its task cut out going ahead, tackling a tough global environment and lower nominal growth. Listed companies had witnessed a sharp decline in profitability in the first half of FY23 due to the surge in commodity prices following the Russia-Ukraine war.
But with the prices of crude oil, metals, chemicals and agri commodities retreating from the mid-2022 peaks, high-cost inventory has also reduced, making corporate bottomlines look healthy again. The 1,223 listed companies (excluding banks and finance companies) which have declared quarterly earnings for the third quarter of FY23, recorded a 19 per cent increase in operating profit and 15 per cent increase in net profit. This improvement in profitability has been aided by a 3 per cent decline in raw material cost and a 11 per cent decline in the cost of oil and fuel compared with the corresponding quarter in FY22. The growth in finance cost was muted, as the transmission of RBI’s rate hikes is not yet complete. However, companies will not be able to grow their revenue at the scorching pace recorded in the preceding quarters as post-pandemic, pent-up demand tapers. Commodity companies have, further, been hurt by decline in realisations. Revenue growth of the 1,223 companies was a muted 0.23 per cent compared to that of last year. Large oil and gas producers, metal manufacturers, pharma and chemical companies witnessed sharp reduction in their revenue as commodity prices declined.
However, large and medium IT service providers managed to beat earnings estimates, despite the ongoing slowdown in the West. This bodes well for urban consumption since this industry is a significant employer of the educated urban youth. Banking companies also managed robust double-digit profit growth as credit demand remained strong and higher interest rates helped their margins. Discretionary goods found more buyers with passenger cars, two-wheelers and consumer durables witnessing more demand. But higher inflation has hurt the revenue as well as profitability of FMCG companies. As more companies declare quarterly earnings, it is possible that the aggregate growth in profits alters.
The writing on the wall is clear; while some sectors may do well, especially in services, slowing consumption caused by RBI’s rate hikes will pose a challenge to most others. A difficult global environment given the uncertainty caused by the ongoing war and programmed growth slowdown in advanced economies will make companies turn their focus on controlling costs to protect margins, rather than embark on ambitious capital investments. The Centre will need to continue with capex heavylifting. Investors will do well to temper their return expectations from the stock market. While overall market valuation has cooled down, there are some over-valued pockets in auto, real estate and capital goods sectors.