BFSI, oil & gas sectors key drivers of India Inc earnings as IT slips

Even as the slowdown in the information technology (IT) services sector deepens, banking, financial services and insurance (BFSI), as well as oil and gas companies, emerge as the primary drivers of corporate earnings in the country.

The IT services sector’s share in corporate earnings declined to a five-year low of 17.4 per cent in the second quarter (Q2) of 2023–24 (FY24), whereas banks and finance companies accounted for 46.5 per cent, and oil and gas firms contributed 16.8 per cent.

At their peak, IT services firms like Tata Consultancy Services (TCS), Infosys, HCLTech, and Wipro represented just over a third of the combined net profit of all listed companies in the Business Standard sample.

A slowdown in the IT services sector is expected to impact the growth of overall corporate earnings in the coming quarters.

Dhananjay Sinha, head of research and equity strategy at Systematix Institutional Equities, observes, “IT services and banks and finance companies were the two biggest contributors to the rise in corporate profitability in the post-pandemic period.

"Earnings growth in the IT services sector has peaked, and there are early signs of a slowdown in credit demand and margin contraction in the BFSI space.

"This is negative for overall corporate earnings in India.”

During the July-September quarter of FY24, the combined net profit of listed IT companies increased by only 3.5 per cent year-on-year (Y-o-Y), marking the slowest growth in the last five quarters.

In comparison, the combined net profit of 428 listed companies that declared their second-quarter results increased by 35.4 per cent Y-o-Y in Q2FY24, primarily driven by significant earnings growth in the BFSI and oil and gas sectors.

The combined net profit of 91 BFSI companies in the Business Standard sample rose by 29.4 per cent Y-o-Y in Q2FY24, while net profits of oil and gas companies, including Reliance Industries (RIL), increased by 103 per cent Y-o-Y in the same quarter.

The data also indicates a steady decline in the contribution of fast-moving consumer goods (FMCG) companies to overall corporate earnings.

FMCG companies such as Hindustan Unilever, ITC, and Nestlé accounted for 6.2 per cent of overall corporate earnings in Q2FY24, significantly down from 7.7 per cent a year ago, marking the lowest figure in at least the past five years.

Analysts suggest that the increasing reliance on BFSI and the oil and gas sectors may result in greater volatility in corporate earnings.

Chokkalingam G, founder and managing director of Equinomics Research, points out, “The margins and profits in the banking and finance and oil and gas sectors are much more volatile due to factors such as changes in interest rates and international crude oil prices.

"In contrast, revenues and earnings growth in the IT services and FMCG sectors are far steadier.”

While some top companies from other sectors, such as Maruti Suzuki India, JSW Steel, UltraTech Cement, and Asian Paints, reported a significant Y-o-Y increase in their net profits in Q2FY24, these companies lack the scale to compensate for the slowdown.

Nine of the 10 most profitable companies in the Business Standard sample in Q2FY24 are from BFSI, IT services, and the oil and gas sectors.

The top three most profitable companies in the sample are RIL (Rs 17,394 crore), HDFC Bank (Rs 16,811 crore), and TCS, in that order.

ITC is the only manufacturing company on the list of the 10 most profitable listed firms in the country.

The combined net profit of all listed companies in the sample increased to around Rs 1.63 trillion in Q2FY24, up from Rs 1.56 trillion in the first quarter (Q1) of FY24 and Rs 1.2 trillion a year ago.

In comparison, the combined net profit of BFSI companies grew to Rs 75,776 crore in Q2FY24, from Rs 71,376 crore in Q1FY24 and Rs 58,565 crore in Q2FY23.

However, there was only a marginal increase in the combined net profit of IT services companies to Rs 28,392 crore, from Rs 27,985 crore in Q1FY24 and Rs 27,434 crore in the second quarter of 2022–23.

BFSI companies have also been the primary drivers of corporate revenues in recent quarters, while companies in other sectors have reported a slowdown in net sales growth.

The net sales (gross interest income) of BFSI companies increased by 28.1 per cent Y-o-Y in Q2FY24, compared to a 2.8 per cent Y-o-Y growth in the net sales of non-BFSI companies during the same quarter.

In Q2FY24, BFSI companies’ share in the overall net sales of listed companies reached an 11-quarter high of 32.2 per cent, while IT services companies’ revenue share declined to a four-year low of 14 per cent.

Similarly, oil and gas companies’ revenue share dropped to 25.9 per cent in Q2FY24, down from 29.4 per cent a year ago.