Fall in commodity, energy prices fuels India Inc earnings

Corporate earnings got a big boost from the fall in commodity and energy prices in July-September 2023 (Q2FY24) despite a slowdown in revenue growth during the quarter.

The combined net profits of 3,123 firms that have declared their results so far were up 38 per cent year-on-year (Y-o-Y) to Rs 3.07 trillion in Q2FY24, up from Rs 2.24 trillion a year ago.

Earnings were, however, down 3.5 per cent on a sequential basis from Rs 3.18 trillion in April-June (Q1) FY24.

Excluding banking, financial services, and insurance (BFSI), and oil and gas firms, the combined net profits of 2,551 firms were up 23.9 per cent Y-o-Y to Rs 1.4 trillion in Q2FY24, the lowest in the last three quarters, and down 16 per cent from the record high quarterly profits of Rs 1.67 trillion posted in the January-March quarter (Q4) FY22.

The gains in corporate earnings in Q2FY24 came largely from a sharp expansion in margins.

The operating profit, or Ebitda (earnings before interest, tax, depreciation and amortisation) margins, was up by 580 basis points to 27.6 per cent of the total income in Q2, the highest in the last 12 quarters.

One basis point is one-hundredth of 1 per cent.

The analysis excludes the listed subsidiaries of other listed companies in the sample to avoid double counting.

In all, 51 listed subsidiaries were identified in the overall sample of listed companies.

Companies across sectors, with the exception of those in information-technology (IT) services such as Tata Consultancy Services (TCS) and Infosys, reported higher margins in Q2FY24 as against the same period a year ago.

For comparison, the Ebitda margins of IT services companies were down 30 basis points Y-o-Y to 22.7 per cent of revenues in Q2FY24 from 23 per cent a year ago.

The oil and gas companies reported the sharpest rise in Ebitda margins to 16.8 per cent in Q2 FY24 from 8.3 per cent in the year-ago period.

In the auto sector, the Ebitda margins were up by 360 basis points to 15.4 per cent of revenues in Q2FY24, the highest in at least the last five years.

Similarly, the margins were up in fast-moving consumer goods and consumer durables sectors, but the increase was far muted.

On the flip side, however, revenues continue to slow across sectors due to a combination of lower demand and decline in price realisation.

The combined revenues, including the other incomes of all 3,123 listed companies in Business Standard's sample, were up by just 6.1 per cent in Q2FY24, the lowest growth in the last 11 quarters.

The companies reported combined revenues of Rs 35.15 trillion in Q2FY24, up from the Rs 33.23 trillion in the year-ago period and Rs 34.54 trillion in Q1FY24.

Some analysts, however, say gains from margin expansion have peaked for now.

The Q2FY24 corporate earnings scorecard so far has been in line with BFSI (banking, financial services and insurance) and automobiles driving the aggregate.

The margin tailwind will moderate in the second half of FY24 with base effect coming into play and pick-up in some commodity prices, write analysts at Motilal Oswal Financial Services.

Any decline in operating-profit margins from current levels could weigh on corporate profits if revenue growth remains in slow lane as seen in the last two quarters.

Among major sectors, BFSI companies grew the fastest in Q2FY24 with 20.9 per cent Y-o-Y growth in revenues, driven by a strong double-digit increase in gross interest income and fee incomes.

They were followed by automobile and auto ancillaries companies, which reported 19.1 per cent Y-o-Y growth in net sales, thanks to higher sales volumes and a rise in average selling price per vehicle.

In contrast, the combined net sales of oil & gas companies were down 8.9 per cent on a Y-o-Y basis in Q2FY24.

Similarly, the combined net sales of IT services companies grew just 6.5 per cent Y-o-Y in Q2 FY24, the slowest increase in the last 11 quarters.

The automotive sector was the third-biggest contributor, accounting for 13 per cent of incremental growth in earnings in Q2FY24, nearly twice their share in overall corporate profits