The September quarter brought mixed fortunes for corporate India. While the broader market showcased resilience with double-digit profit growth, the performance of oil and gas companies dragged the overall numbers down. This blog dives deep into the five key insights, challenges, and future implications for India Inc, based on the latest earnings data.
1. Corporate Earnings Snapshot: Double-Digit Growth Amid Challenges
Corporate India’s earnings trajectory for the September quarter continued to shine, marking the seventh consecutive quarter of double-digit profit growth, excluding the oil and gas sector. However, the pace of growth has moderated since the March quarter, reflecting underlying economic pressures.
Key Highlights (Excluding Oil & Gas):
- Net Profit Growth: A robust 15.2% year-on-year increase.
- Revenue Growth: Healthy 8.5% year-on-year expansion.
- Earnings were broadly in line with expectations across most sectors, barring commodities.
Including Oil & Gas Companies:
- Profit Growth: Slowed significantly to 3.4% year-on-year.
- Revenue Growth: Dropped to 6.8% year-on-year.
- Sectoral Impact: Oil and gas companies faced a 46.7% decline in net profit, despite a modest 1.6% rise in revenue. The sector’s performance was hampered by lower refining margins and LPG under-recoveries.
2. Challenges Hindering Profit Growth
The quarter’s earnings spread revealed some concerning trends, with only 62% of companies meeting or exceeding profit expectations, according to Motilal Oswal Financial Services.
Key Constraints:
- Higher Base Effect:
- The corresponding quarter last year witnessed a stellar 36% profit growth, supported by lower commodity and energy prices. This high base created tough year-on-year comparisons.
- Rising Interest Costs:
- Companies faced increased working capital requirements, leading to higher borrowing costs. This squeezed profit margins across multiple industries.
- Reduced Extraordinary Gains:
- Unlike previous quarters, the absence of extraordinary income limited the scope for profit enhancement.
- Global and Domestic Headwinds:
- Ongoing global economic uncertainties and inflationary pressures added to the challenges faced by India Inc.
3. Sectoral Insights: Commodities Weaken, Electronics Shine
Commodities and Oil & Gas:
The oil and gas sector emerged as the weakest link in the earnings chain. Lower refining margins and LPG under-recoveries significantly impacted profitability.
Boost from Electronics and Consumer Durables:
On a brighter note, the festive season bolstered the performance of electronics and consumer durables. Robust sales of large appliances, smartphones, and laptops drove 13% value sales growth and 8% volume growth during the festive period.
4. Implications for Investors: What Lies Ahead?
The deceleration in profit growth raises important questions for investors:
- Will Earnings Rebound in H2?
- Analysts expect a recovery in the second half of the fiscal year, driven by improved domestic demand and easing cost pressures.
- Sectoral Rotation:
- Sectors like consumer durables, IT, and financial services are expected to outperform, while commodities and oil & gas may remain under pressure.
- Market Sentiment:
- With a weak broader stock market, corporate earnings will play a pivotal role in influencing investor confidence.
FAQs
Q1: Why did oil and gas companies perform poorly in the September quarter?
Oil and gas companies struggled due to lower refining margins and LPG under-recoveries, leading to a significant decline in net profit.
Q2: Which sectors performed well in the September quarter?
Excluding commodities, sectors like consumer durables, IT, and financial services delivered strong performances. Electronics sales saw a notable boost during the festive season.
Q3: What are the expectations for corporate earnings in the second half of the fiscal year?
Analysts expect a recovery in earnings, driven by improved domestic demand, easing inflation, and sectoral rotation toward consumer-focused industries.
Q4: How did higher interest costs affect corporate profits?
Rising working capital requirements increased borrowing costs, squeezing profit margins across multiple industries.
Q5: Is the slowdown in profit growth a long-term concern?
The slowdown is primarily attributed to temporary factors like a higher base effect and extraordinary gains in the previous year. The medium-term outlook remains positive for most sectors.
Conclusion: Resilience with a Cautious Outlook
The September quarter results reflect a nuanced picture of India Inc’s performance. While the majority of sectors showed resilience, achieving double-digit profit growth excluding oil and gas, the overall growth rate has decelerated. Key challenges such as higher base effects, rising interest costs, and subdued performance in the oil and gas sector have tempered profit growth.
Despite these hurdles, the robust performance of sectors like consumer durables and electronics, spurred by festive demand, offers optimism. As we move into the second half of the fiscal year, the focus will shift to recovery in corporate earnings, driven by improving domestic demand and easing cost pressures.
For investors, the current scenario underscores the importance of sectoral diversification and a cautious approach to commodity-linked sectors. The coming quarters will be critical in determining whether India Inc can sustain its growth momentum or faces further headwinds in an uncertain global and domestic economic environment.
