India Inc’s earnings for the second quarter of FY23 bear distinct scars from rising commodity prices and interest rates; the buoyancy in revenue growth has not helped mitigate the impact. Listed companies, excluding banks and finance companies, which have declared results for the September 2022 quarter so far, have recorded a robust 31 per cent growth in revenue compared to the corresponding quarter in FY22. Economic activity reviving with abatement of the pandemic and consumption demand reverting to pre-pandemic levels helped boost revenue growth. Realisations were also aided by rising inflation in Q2.
But despite the top-line growth, operating profit declined 9 per cent and net profit fell 23 per cent compared with the same quarter last fiscal year. Higher commodity prices resulted in increasing raw material as well as fuel cost for companies. While raw material cost was 46 per cent higher compared with last year, fuel and lighting bill was 63 per cent higher. Operating margin eroded from 14 per cent in September 2021 to 10 per cent this year. Further, RBI’s 190 basis points increase in policy rates this year has resulted in increasing the finance cost of companies by 17 per cent.
While the picture at the aggregate level appears dismal, some sectors managed to show resilience in a challenging quarter. Both private as well as public banks reported good set of numbers led by strong improvement in credit offtake across segments, improving asset quality and improving margins. Improvement in demand for vehicle and housing finance has aided NBFCs. IT companies, especially the larger ones, reported improvement in operating margins thanks to moderation in attrition and reported decent traction in deal wins. Rupee depreciation further helped revenue growth. While services sectors managed relatively well, manufacturing companies did not fare too well, especially those unable to pass on the cost increase to customers. Companies in sectors such as FMCG, two-wheelers and tractors, chemicals, cement and constructions witnessed decline in operating profit as raw material and fuel cost shot up. While metal, mining and oil companies benefited from higher prices, uncertain demand due to global slowdown and high input costs made many of them report decline in profitability. However, with expectation of input cost pressure having peaked, the pressure on margins could ease in the coming months.
That said, investors appear to be too optimistic regarding future stock price performance. They are brushing aside the continuing risks in global central bank tightening, threat of recession in many economies and geopolitical problems, which has led to steep price corrections in other equity markets. While MSCI India index has delivered 2 per cent gains in the 12 months to the end of October, MSCI Emerging Market index is down 33 per cent in the same period. Indian stocks are also trading at a steep premium compared to their emerging market counterparts; MSCI India is trading at price earning multiple of 24.4 times, but MSCI EM is trading at just 9.6 times. External risks can lead to sharp price corrections in domestic equity markets too.