Firms outside the banking and finance sector too have delivered healthy profits
Disposable incomes will have rise to support aspirational spending | Photo Credit: NAVEEN0301
India Inc has sprung a surprise by reporting strong profit growth for the April-June 2023 earnings season. An analysis by this newspaper of 1,505 listed companies showed that they posted a year-on-year growth of 50.3 per cent in adjusted profits (excluding one-offs) in Q1 FY24 against 25.4 per cent in the preceding quarter (Q4 FY23), and 5.7 per cent in the quarter before that. The banking sector, which is riding on a combination of a credit boom and record-low bad loans, made a sizeable contribution to the numbers with 62 per cent profit growth. But companies outside banking and financial services (BFSI) have also delivered a healthy 44.8 per cent growth in profit.
The sequential improvement in profit growth for non-BFSI firms is being powered by a rebound in operating profit margins, which have risen from 18.3 per cent in Q2FY23 to 23.8 per cent in the latest quarter. The global slowdown seems to have delivered a margin lift for domestically focussed sectors ranging from oil marketing to cement, by precipitating price declines in industrial inputs. Overall, the report card provides comfort that the recent bull run that has taken indices to new life highs, is not just irrational exuberance, but has some moorings in fundamentals. A deeper dive into the numbers provides insights on divergent trends in the economy. One, as input cost pressures have been abating, aggregate demand seems to be losing momentum too, especially on the consumption front. Revenue growth for the 1,505 companies slowed to 6.5 per cent for Q1 FY24, compared to 15 per cent and 19.1 per cent in the preceding two periods. Bank credit demand though has remained high, perhaps hinting at more credit-funded consumption. Consumer services ranging from realty to hospitality seem to be slowing down. It remains to be seen if incipient rural recovery helps reverse trends in some sectors.
Two, in contrast to consumer-facing companies, industrials have managed to improve sales momentum. Infrastructure (26.7 per cent), cement (12.6 per cent), capital goods (23.5 per cent) and telecom equipment (216 per cent) all registered sequentially higher revenue growth. This suggests that the investment leg of the economy, powered by the government capex binge, is now outdoing the consumption leg. But visibility on private consumption may be important for the private sector to undertake more capex. Three, despite steep rate increases, India Inc continues to be on a good wicket on debt servicing, with the interest coverage ratio improving to 5.4 times (from 4.3 times in Q2). With both lenders and corporate borrowers sitting on healthy balance sheets, there seems to be no structural impediment to a private investment pickup.
For policymakers, the key takeaway is that for the economy to fire on all cylinders, disposable incomes may need to grow enough to support aspirational spending. This will require keeping inflation within reasonable bounds and a rethink on the high incidence of taxation on the middle class.
aniltikotekar4sme.com 