Headline numbers from India Inc’s latest quarterly report card suggest that the good times have continued for the large companies, benefiting both from the formalisation of the economy during Covid and the subsequent rebound in demand. An analysis by this newspaper of the results of 1,268 listed companies for April-June FY23, shows a strong 38 per cent growth in revenues year-on-year trickling down to a 15.5 per cent growth in net profits. But a dissection of the numbers suggests that the pace of both demand and profit recovery at India Inc has lost speed in Q1 FY23, after displaying strong momentum in the preceding three quarters. Sequential revenue growth after averaging about 10 per cent until Q4 FY22, slowed to 4.5 per cent in Q1 FY23. Gross margins moderated from 62.3 per cent in Q1 FY22 to 52.9 per cent in Q1 FY23 after taking a pounding from rising raw material, energy and transport costs. This has led to absolute profits for the universe of companies coming in lower in Q1 FY23 than for Q4 FY22. But there is considerable sectoral divergence in the numbers which offers insights into Indian economy’s two-speed recovery from the pandemic.

Sectors that saw sizeable demand destruction during Covid have registered a sharp bounce-back in offtake this year. Compared to the depressed April-June quarter of 2021 marked by Covid’s second wave, a range of sectors managed 50 to 100 per cent year-on-year revenue growth — trading and retail, apparel, jewellery, realty, aviation, hospitality, fertilisers, power and gas distribution, paints and chemicals. Services such as trade, hospitality, logistics and aviation as well as industries that power the core economy such as power, fertilisers, refineries and gas, saw strong sequential growth in Q1 FY23 showing that the demand growth wasn’t entirely a function of the low-base effect. But then, sectors such as cement, steel, automobiles and capital goods did show a deceleration compared to the previous quarter. Manufacturing industries such as cement, steel, mining and construction seem to have absorbed higher input and freight costs this quarter, leading to margin compression. But consumer-facing sectors such as FMCG, paints, durables and automobiles wielded their pricing power to mostly pass on their input increases to consumers. It however remains to be seen if demand for them remains resilient, once this sticker-shock hits consumers at a time of high inflation in their household budgets. There was no evidence in this quarter’s numbers that the Reserve Bank of India’s sharp interest rate hikes of over 140 basis points in the last three months are hurting India Inc, with banks delivering strong revenue and profit growth and interest cover holding steady for the manufacturing universe. But the real test will come in the festive season as the higher interest rates trickle down to the consumer.

Overall, with no low-base effect to lean on and the global price windfalls for the commodity giants gradually fading, India Inc is likely to face an uphill task in delivering an encore of its FY22 profit growth for this fiscal. Analysts however seem to be reluctant to acknowledge this ground reality, and have been effecting minimal downgrades to their Nifty earnings estimates both for this fiscal and the next one. Stock market investors who’ve enjoyed a 16 per cent rebound in the Nifty50 from June lows, need to brace for speedbumps ahead.

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