Operating margins put the pedal to the metal on corporate earnings, fuelled by sector-wide Ebitda margin gains, driving net profits to victory in five straight quarters.
Krishna Kant and Ram Prasad Sahu/Business Standard get a ringside view.
Operating margins have been the primary driver of corporate earnings in India in recent quarters, despite revenue growth suffering from weak consumer demand.
Companies across sectors have reported a sharp improvement in earnings before interest, tax, depreciation, and amortisation (Ebitda) margins over the past two years, benefiting from lower commodity and energy prices.
Higher margins more than compensated for slower revenue growth, resulting in double-digit growth in net profit for five consecutive quarters.
Adjusted for exceptional gains and losses, the combined net profit of listed companies rose by 11.4 per cent year-on-year (Y-o-Y) in the fourth quarter (Q4) of 2023-24 (FY24), down from 17.3 per cent in Q4 of 2022-23 (FY23) and 24.1 per cent in the third quarter (Q3) of FY23.
Quarterly combined revenues increased by 8.4 per cent Y-o-Y, a decline from 13 per cent in Q4FY23 but an improvement from 7.3 per cent in Q3FY24.
Ebitda margin for the quarter increased to 26.3 per cent of revenues in Q4FY24, up from 24 per cent a year ago but slightly down from 26.4 per cent in Q3FY24.
This fourth-quarter Ebitda margin was nearly 230 basis points (bps) higher than the five-year average of 24 per cent. Consequently, the net profit
margin reached 8.9 per cent of revenues in Q4FY24, close to an all-time high and nearly 190 bps higher than the five-year average net profit margin of 7 per cent.
Sector-wise, corporate earnings in Q4 were driven by domestic cyclical sectors such as automotive, banking and finance, capital goods, cement, pharmaceutical, and healthcare.
In contrast, global cyclicals such as metals and mining and oil and gas companies underperformed, dragging down profitability.
The quarter also saw fast-moving consumer goods companies and information technology services exporters experiencing flat to low single-digit growth in revenues and profits.
According to analysts at Motilal Oswal Financial Services, corporate earnings exceeded expectations, largely due to stronger-than-anticipated performances from lenders and the automotive sector.
They noted that gains from margin expansion appear to have peaked in Q4FY24.
Here is the earnings scorecard of top companies across 10 major sectors in the listed space for Q4FY24.
Metals & Mining
- The fourth quarter (Q4) of 2023-24 was weak for metals and mining companies, with flat to negative growth in net sales and contraction in net profit, despite gains from lower energy costs
- Aluminium producer Hindalco and coal miner Coal India were exceptions, reporting high double-digit net profit growth in Q4 due to lower operating expenses that offset weak sales growth
- Analysts attribute the sector s muted Q4 performance to weak price realisation and high coal costs, despite higher sequential volumes
- Tata Steel and JSW Steel were the biggest laggards in Q4, with net profit declines of 64.1 per cent and 64.5 per cent year-on-year (Y-o-Y), respectively, and net sales down 6.1 per cent and 1.5 per cent Y-o-Y
Automotive
- The automotive sector was one of the best-performing in the fourth quarter of 2023-24, with healthy volume-led sales growth driven by Tata Motors, Maruti Suzuki India (MSIL), and Bajaj Auto
- Among the sector s categories, two-wheelers saw the highest growth, up 26 per cent year-on-year, led by demand in the 125 cc+ segment and a favourable base
- However, commercial vehicle volumes declined on a high base, while tractors fell sharply due to subdued rural sentiment and erratic weather
- Gross margins were strong due to product mix and volumes, but future gains depend on stable raw material costs
- Motilal Oswal Research believes that most volume and input cost gains are already realised, suggesting that investors need to be selective to outperform.
- MSIL is among its top picks
Capital Goods & Infra
- The fourth quarter (Q4) of 2023-24 (FY24) was positive for capital goods manufacturers and construction and infrastructure companies
- Most firms in these segments reported high double-digit growth in net profit due to lower commodity and raw material prices, besides higher revenues
- Larsen & Toubro (L&T) and Bharat Heavy Electricals (BHEL) underperformed compared to peers like Siemens, ABB, and Cummins India
- BHEL's net sales were flat year-on-year (Y-o-Y), with net profit down 25.6 per cent Y-o-Y in Q4FY24. L&T s net sales rose 15 per cent Y-o-Y, with net up 10.3 per cent Y-o-Y
- Siemens, ABB, Cummins India, and Adani Ports reported net profit growth of 50-80 per cent Y-o-Y in Q4, driven by higher sales and lower raw material costs
FMCG
- The sector posted low single-digit revenue growth due to an extended winter, food inflation, competitive pressures, and uneven economic recovery
- While paints and cigarettes saw volume growth on a strong base, it remained muted for health drinks and beauty and personal care
- Lower input costs led to higher gross margins, but operating levels did not reflect this due to competitive pressures and the need to boost volumes, resulting in price cuts and higher promotional spending
- A positive for the sector is the revival in rural markets. With expectations of better monsoon and government incentives, rural demand is expected to improve steadily in the quarters ahead, says Centrum Research. It prefers Britannia Industries, ITC, Emami, and Asian Paints
Consumer & Retail
- Consumer sentiment and discretionary spending were sluggish, especially in the first two months of the fourth quarter of 2023-24
- Wedding demand was weaker than last year, leading to muted premium-category sales for lifestyle brands (Aditya Birla Fashion and Retail) and Vedant Fashions, notes PhillipCapital Research
- The jewellery sector maintained momentum in footfall and revenue. Quick-service restaurant chains and footwear companies struggled due to local competition
- Although sector valuations appear stretched, an improving outlook leads Centrum Research to prefer Titan Company, Kalyan Jewellers, V-Mart, Metro Brands, and VIP Industries
IT/Software
- The performance of information technology (IT) services majors in the fourth quarter of 2023-24 was impacted by cancellations, ramp-downs, and changing project scopes. The Big 6 IT majors reported sequential constant currency growth ranging from minus 2.2 per cent to 1.1 per cent
- On the profitability front, Tata Consultancy Services and Wipro performed well, while Infosys and LTIMindtree disappointed due to deal cancellations
- nMargin gains could be challenging as IT majors indicate little scope for further gains on sub-contractor costs
- Given the demand environment, JM Financial Research prefers stocks with better-aligned expectations and valuation multiples offering a safety net
Oil & Gas
- The fourth quarter (Q4) of 2023-24 (FY24) was a muted quarter for oil and gas companies, with flat-to-low single-digit growth in revenues and a decline in margins and profits
- Among top producers, Oil and Natural Gas Corporation (ONGC) and GAIL (India) were outliers, reporting strong profit growth thanks to gains from lower operating costs that more than compensated for the lower revenue growth
- Public sector oil-marketing companies such as Indian Oil Corporation (IndianOil) and Bharat Petroleum Corporation (BPCL) reported a decline in margins due to lower gross refining margins in Q4, which was partly offset by an improvement in marketing margins
- The oil-to-telecommunications major Reliance Industries (RIL) was also a laggard with a 1.8 per cent year-on-year (Y-o-Y) decline in net profit in Q4, while its net sales were up 11.1 per cent Y-o-Y during the quarter
Banking
The fourth quarter (Q4) of 2023-24 was mixed for banking, with public sector banks (PSBs) outperforming private sector peers in net profit growth
Private sector banks such as ICICI Bank, Axis Bank, Kotak Mahindra Bank, and IndusInd Bank reported faster growth in loan books and gross interest income in Q4
In Q4, State Bank of India s net profit rose 24 per cent year-on-year (Y-o-Y), while Punjab National Bank's net profit increased by 159.8 per cent Y-o-Y
Earnings growth for PSBs was driven by a continued decline in provisions and contingencies for bad loans, along with faster growth in high-yield personal loans
Most banks, however, reported a contraction in net interest margins (NIMs) as interest expenses grew faster than gross interest income
Finance & Insurance
- The fourth quarter (Q4) of 2023-24 was mixed for finance and insurance companies, with non-banking lenders showing faster earnings growth while insurance firms reported relatively slower revenue and profit growth
- In Q4, SBI Life Insurance and HDFC Life Insurance's net profit increased by 4.4 per cent and 13.7 per cent year-on-year, respectively
- In the non-banking lending space, vehicle financiers like Shriram Finance and Sundaram Finance showed faster revenue and profit growth compared to diversified lenders and housing finance companies
Pharma & Healthcare
- Pharmaceutical companies showed a strong performance in the fourth quarter of 2023-24, with 10-12 per cent revenue gains and 25-27 per cent operating profit growth
- This marked the seventh consecutive quarter of healthy double-digit year-on-year growth in US generics at an aggregate level, according to Motilal Oswal Research
- The India business saw mid-to-high single-digit growth but was impacted by a muted showing of acute therapies
- Hospital chains showed robust performance at the operating level due to stable occupancies, higher average revenue per bed, and improved surgical revenue