India Inc clocks strongest revenue growth in 9 quarters; margins squeezed by rising costs

While net profit also grew in double digits at 11%, rising input costs made it the slowest growth rate in a year. In the coming quarters, festivals and wedding season, and focus on product premiumisation are expected to sustain revenue momentum and support future profitability.

For a common sample of 3,589 companies, revenue net profit grew in double digits for the third and fourth consecutive quarter respectively. In addition, the momentum was stronger in the case of smallcap and midcap companies. “Nifty 50 and Nifty 100 delivered EPS (earnings per share) growth of 11.0% and 8.3%, respectively, while the Midcap 150 and Smallcap 250 reported significantly stronger growth of 34.0% and 36.4% in that order,” said Feroze Azeez, Joint CEO, Anand Rathi Wealth.

Banking and finance companies continued to lend support to the sample’s bottomline. Excluding the lending sector, the sample’s net profit growth shrank to 5.4% largely on account of a poor performance by the oil and gas sector due to higher fuel marketing losses and rising LPG under-recoveries amid volatile international energy prices. Excluding oil and gas companies, the sample’s net profit growth improved to 20.9% for the June quarter.

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The total sample’s operating margin contracted to 16.6% in the June quarter from 19.6% in the year-ago period, reflecting the impact of higher input cost inflation.

Excluding banking and finance companies, the sample’s raw material costs relative to revenue increased to 38% — the highest in at least 13 quarters — from 33.6% a year ago. The quarterly range for this ratio was 33-35% during the past three years.

The June quarter margins remained under pressure due to elevated input costs though the impact was partially cushioned by the utilisation of lower-cost inventory,” said Vinod Nair, Head of Research, Geojit Investments. He expects this benefit to moderate in the September quarter as higher-cost inventory flows through the profit and loss account while monsoon-related disruptions may pose near-term challenges for select sectors. “Nevertheless, premiumisation trends and seasonal demand from the festive and wedding periods are expected to provide support,” Nair added.

On the sector front, banking and finance, capital goods, healthcare, retail and jewellery companies reported strong performance while sectors such as automobiles, cement, consumer goods, and oil and gas reported pressure on profits and profitability. “The strong performance of sectors including financials and capital markets suggests continued strength in credit growth, asset quality and market activity,” said Azeez.

For the remainder of the current fiscal year, analysts expect a broad based improvement in financials with trend in commodity prices as a key decisive factor. Aziz expects around 13% EPS growth in large caps and a stronger growth of 18-20% for midcaps and smallcaps. “Overall, we remain constructive on the earnings outlook, while maintaining a selective approach based on valuations and earnings across sectors and market-cap segments,” Azeez said.

Nair expects continued strength in credit growth, infrastructure spending and capex activity to support earnings momentum. “However, commodity price volatility, inflation trends and geopolitical developments remain key monitorable,” Nair said.