India Inc’s operating profit margin (OPM) expanded 180 basis points (bps) sequentially to 16.3 per cent q-o-q during the December 2023 quarter (Q3 FY23) despite subdued sequential revenue growth of 1.4 per cent, according to an analysis by ratings agency ICRA. It added that margin pressures are likely to ease further in the coming quarters given softening of commodity prices, but uncertainties remain.
“Despite the fact that it was a seasonally strong quarter due to the holiday season, sequential revenue growth was relatively muted due to inflationary headwinds weighing on consumer sentiments and an uneven sectoral trend. Sectors such as airlines, hotels, gems & jewellery, capital goods and fertilisers reported revenue growth on a sequential basis due to successive price hikes and strong demand supported by festive period sales,” ICRA said in its report.
In its analysis of the Q3 FY2023 performance of 620 listed companies (excluding financial sector entities), ICRA said sectors like chemicals, consumer durables, logistics, textiles and power witnessed a sequential decline in revenues during the quarter due to factors such as stagnant demand and decline in realisation levels, following reduction in input costs.
The report revealed expectedly positive revenue trends, with a YoY (year-on-year) growth of 17.2 per cent, despite subdued sequential revenue growth of 1.4 per cent. “Almost all sectors reported revenue growth in year-on-year (YoY) terms in Q3 FY2023, with hotels, oil and gas, auto, airlines, and power leading the way, which is likely to bolster the GDP growth in that quarter.”
Sruthi Thomas, assistant vice-president & sector head at ICRA, said, “The YoY growth in revenues during Q3 FY2023 was primarily driven by increased realisation levels on account of input cost inflation, along with moderate volume growth aided by revival in demand across sectors. ICRA’s analysis shows that the operating profit margins (OPM) of India Inc contracted by 237 bps on YoY basis in Q3 FY2023 due to inflation in input costs arising from increase in commodity prices, as well as spike in energy costs, which could not be entirely passed on to the customers.”
Thomas added that the OPM of India Inc, however, expanded by 180 bps sequentially to 16.3 per cent during the quarter, aided by a softening in the prices of many commodities on a sequential basis and general price hikes undertaken by the entities. The sequential margin expansion was most visible in select sectors such as aviation, hotels, cement, and power.
“While margin pressures are likely to ease further in the coming quarters given further softening of commodity prices, uncertainties remain due to the evolving geo-political situation. Hence, despite some softening and stabilisation of commodity prices over recent months, India Inc.’s ability to improve earnings will be dependent on headwinds such as energy cost inflation, evolving recessionary trends in the developed markets, and impact of fluctuations in foreign exchange on both imports as well as export-oriented sectors,” Thomas said.
The interest coverage ratio of ICRA’s sample, adjusted for sectors with relatively low debt levels (IT, FMCG and pharma), witnessed a YoY moderation in Q3 FY2023 to 4.3 times from 5.1 times, mainly on account of a) lower earnings in select sectors as compared to historic trend and b) higher interest rates on the back of rate hikes by the Monetary Policy Committee (MPC).
ICRA said it believes that the sequential recovery in the overall performance of India Inc is contingent upon how well the entities are able to cope with the headwinds going forward. General price increases taken by entities across sectors, coupled with stabilisation of input costs and easing of supply chain constraints such as semiconductor chip shortage, can pave way for margin recovery in the coming quarters.
“However, concerns of a global recession coupled with ongoing geo-political situation, which may adversely impact demand sentiments, could derail the pace of recovery. Furthermore, the movement in foreign exchange rates would impact the revenue growth and earnings profile of India Inc,” the report said.
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