Numbers tell the true story. And the numbers for the third quarter of fiscal ending March 2023 are anything but inspiring, to say the least. You could cheer the big earnings surprise delivered by banks and financials, or you could sulk over the disappointing show of steel, cement and pharmaceuticals. There are pockets of cheer and concern, depending on where you are looking. What this doesn’t clearly make for is a picture of an economy chugging along nicely, as some might suggest.
But let’s take a closer look at the numbers to get a better sense. We reviewed results of companies in the BSE-500 index that have reported earnings so far.
WHAT THE NUMBERS REVEAL
We segregated the non-financial businesses (351 of a total 423 reviewed) to assess their performance and found that in aggregate incomes were up a healthy 15.7 percent year-on-year, but profits were down by 11 percent, with interest costs far outpacing growth. On a quarter-on-quarter basis, while incomes rose less than 2 percent, profits improved sharply by near 21 percent as lower input costs likely helped. This is also suggested by the margins (PBIDT percentage) that improved by 70 basis points (or 0.7 percent) quarter-on-quarter, though this was 1.2 percent lower than a year ago.
| Q3 REVIEW (Non-Financials BSE-500) |
| Particulars | YoY | QoQ |
| Operating Income | 15.7% | 1.8% |
| Employee Exp | 16.4% | 4.4% |
| Operating Profit | -0.5% | 14.3% |
| Other Income | 21.4% | 7.9% |
| Interest | 26.8% | 10.6% |
| PBDT | -4.1% | 14.2% |
| Depreciation | 11.5% | 3.8% |
| PBT | -9.6% | 19.45 |
| Tax | -4.8% | 15.2% |
| PAT | -11.1% | 20.9% |
| PBIDTM % | -1.2% | 0.7% |
(Source: ACE Equity)
The picture for financials is very different, aided by the favourable early effects of an interest rate upcycle where assets get repriced ahead of liabilities and with credit costs yet to pick-up after a significant balance sheet clean-up. Incomes were up over 25 percent year-on-year, a step ahead of interest costs, this and better operating leverage led to profit growth of 41 percent. The quarter-on-quarter numbers were equally healthy as credit costs remained in check with income and profit growing 9 percent and 13 percent, respectively.
| BANKS Q3 REVIEW |
| Particulars | YoY | QoQ |
| Operating Income | 25.4% | 9.1% |
| Employee | 19.6% | 11.3% |
| Other Income | 15.0% | 8.9% |
| Interest | 25.2% | 9.4% |
| PBT | 39.4% | 13.5% |
| Tax | 34.4% | 14.8% |
| PAT | 41.25 | 13.0% |
(Source: ACE Equity)
The NBFCs also mostly fared well, seeing strong growth and incomes and profits.
SOME WORRy, SOME HOPE
Some of the core sectors linked closely to the growth in the economy failed to deliver. Cement was a weak spot with sales growing a healthy 15 percent year-on-year, but profitability seeing a significant deterioration, though there was some improvement on this front quarter-on-quarter. Will the government’s big push to capital expenditure and focus on affordable housing provide a fillip to the fortunes of cement makers remains the big question. In steel, both the year-on-year and quarter-on-quarter performances were uninspiring with sharp declines in profitability noted, but there is now hope that China’s economy reopening will aid fortunes.
The other worry spot is the slow growth in what has been often referred to as the fast-moving consumer goods (FMCG) industry. The household and personal care segment (includes, HUL, Colgate etc) saw profits grow just 5 percent year-on-year and 1 percent quarter-on-quarter, with margins down 1.8 percent year-on-year but higher 1.1 percent quarter-on-quarter, as some input cost pressure eased. A revival in consumption, especially in the inflation-impacted lower income segments remains the big hope for the industry.
Pharmaceuticals was the other prominent sector with disappointing results. Profits were down 5 percent year-on-year and 1.4 percent quarter-on-quarter. Chemicals too saw margin pressures emerge, though there was some improvement quarter-on-quarter. These companies, though, a sharp jump in interest costs, which dented cash profitability.
IT Services managed to eke out good growth quarter-on-quarter and year-on-year, at 8.2 percent and 19.8 percent, respectively, but profitability remained impacted. Profits grew at a slower pace of 10 percent year-on-year, but improved to 9.6 percent quarter-on-quarter as some attrition pressure eased. The hope here is of a soft landing in the US, which could keep the business momentum from slowing too much and transformation projects coming back sooner than expected.
HOPE FLOATS
In a nutshell, therefore, other than the superlative performance of banks in the quarter, which could also wane as we move deeper into the credit cycle, the performance has been lackluster. And unless hopes of a China resurgence fillip for commodities, a boost from Government capex, a revival in consumption and a soft landing in the US economy translate into reality, the earnings momentum of India Inc could be significantly dented in the coming quarters.
Hope for the best, but don’t invest in hope. Invest in value if you would like to emerge unscathed from this hope-fueled market.
