Margin gains propel India Inc's Q3 profit

Corporate India reported high double-digit growth in net profit for the fourth consecutive quarter in October-December 2023 (Q3FY24), driven by margin gains from lower prices of raw material and energy.

Higher margins more than compensated for the slowdown in revenue, which grew in single digit for the third consecutive quarter.

The numbers also suggest corporate earnings have reached a plateau with overall net profit relatively unchanged in the last four quarters.

The combined net profit of 3,342 listed companies that have declared their quarterly results until February 14 was up 24.7 per cent year-on-year (Y-o-Y) to Rs 3.18 trillion in the quarter under review, from Rs 2.55 trillion a year ago.

The combined earnings were, however, up only marginally from Rs 3.15 trillion reported in Q2FY24 as well Q4FY23.

In comparison, the combined net sales (gross interest income in the case of banks and lenders) of the 3,342 companies were up just 7.8 per cent Y-o-Y in Q3FY24, decelerating from the 16.8 per cent Y-o-Y growth in the year-ago period, but an improvement from the 5.7 per cent in Q1 and the 5.9 per cent reported in Q2FY24.

The companies in the Business Standard sample reported combined net sales of Rs 34.63 trillion in Q3FY24, as against Rs 32.13 trillion in Q3FY23 and
Rs 33.57 trillion in Q2FY24.

The upside in earnings largely came from margin expansion.

On an aggregate basis, the companies’ operating margin, or Ebitda, was up 322 basis points Y-o-Y to 26.7 per cent of total income in Q3FY24 from 23.5 per cent in Q3FY23.

The operating margin is also 250 basis points higher than the five-year average margin of 24.2 per cent.

However, the margin was down nearly 70 basis points on a quarter-on-quarter (Q-o-Q) basis from a 12-quarter high of 27.4 per cent in Q2FY24.

With this, the corporate margin is up nearly 500 points or 23 per cent cumulatively since the September 2022 quarter (Q2FY23), when it had hit a low of 21.8 per cent.

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

Similarly, the combined net profit margin is up 112 basis points Y-o-Y to 8.66 per cent of total income in Q3FY24, up from the 7.54 per cent in Q3FY23.

It is also significantly up from a low of 6.72 per cent in Q2FY23, and the five-year average figure of 6.9 per cent.

Companies across sectors gained from higher operating margins in Q3FY24 with the exception of IT services companies such as Tata Consultancy Services, Infosys, and Wipro.

The IT companies reported a Y-o-Y decline in margin in Q3FY24 due to growing mismatch between growth in their net sales and expenses on salaries and wages.

The biggest gains in margins accrued to oil and gas companies (up 30 per cent Y-o-Y), followed by mining and metal firms (up 21 per cent Y-o-Y) and auto and auto ancillary players (up 13.3 per cent Y-o-Y).

The combined net profit of 2,753 companies excluding banks, finance, and insurance (BFSI) and stockbroking was up 29.4 per cent Y-o-Y to around Rs 2.06 trillion in Q3FY24, up from Rs 1.59 trillion a year ago.

Their aggregate net sales were up 4.5 per cent Y-o-Y to Rs 27.38 trillion in Q3, a deceleration from the 15.9 per cent growth reported in Q3FY23, though again higher than the previous two quarters.

The combined net profit of BFSI companies was up 16.7 per cent Y-o-Y to Rs 1.11 trillion in Q3FY24 from around Rs 96,000 crore a year ago, while their gross interest income was up 22.2 per cent Y-o-Y in the quarter.

This is the slowest earnings growth for BFSI companies in the last 14 quarters.

The combined net profit of 2,732 companies excluding BFSI and oil and gas firms was up 27.1 per cent Y-o-Y to around Rs 1.57 trillion in Q3, up from around Rs 1.24 trillion a year ago and Rs 1.48 trillion in Q2FY24.

Their combined net sales were up 6.8 per cent Y-o-Y to Rs 19.58 trillion in Q3, a sharp slowdown from 14 per cent Y-o-Y growth in Q3FY23 but almost unchanged from 6.7 per cent in the second quarter of FY24.

The combined net profit of 21 oil and gas companies in the sample was up 37.8 per cent Y-o-Y to Rs 48,152 crore in Q3FY24 compared to Rs 34,951 crore a year ago but lower than the Rs 59,505 crore in Q2FY24.

Most of the major sectors reported a slowdown in revenue growth in Q3FY24 with the exception of oil and gas companies.

The combined net sales of companies such as Reliance Industries, Indian Oil and Oil and Natural Gas Corporation were down 0.8 per cent Y-o-Y in Q3FY24, a sharp improvement from the 8.9 per cent Y-o-Y decline in Q2FY24.