In the quarter ended December 2023, India Inc reported an uptick in revenue growth even as margin expansion continued to aid its bottomline. For the 1,357 companies (ex-BFSI) that had reported results till February 8, revenue growth at 4.8 per cent year-on-year is a normalisation compared to 1.7 per cent YoY reported last quarter. Adjusted PAT growth at 38 per cent YoY (69 per cent YoY in Q2FY24) was aided by the 235 bps YoY EBITDA margin expansion to 16.4 per cent.

With the favourable input cost scenario entering its last leg, the outlook may tilt towards organic business prospects. India Inc will have to leverage its balance-sheets, which it has been strengthening.

Sectors on the rise

Strong demand for power and energy and lower commodity cost of production (coal and oil) continue to aid related sectors. Refineries including Reliance, IOCL and BPCL are posting elevated refining and/or marketing margins. The sector reported a 65 per cent YoY adjusted PAT growth on flat revenue growth.

Similarly, power generation related companies (NTPC, PowerGrid) reported a 6.6 per cent YoY revenue growth and 48 per cent PAT growth.

Steel and cement sectors reported strong bottomline growth at 310 and 190 per cent YoY, despite revenue growth of just 2 and 10 per cent YoY, respectively. These sectors gained from the benign power, energy and logistics costs even as finished product realisation growth was lacklustre. The sectors are already staring at rising power costs but can only expect a 2-3 per cent YoY improvement in steel and cement prices.

Banks and automobiles continued their strong run in earnings. Banks repricing deposits higher to sustain the high credit growth has dented profitability marginally. Against a 30 per cent YoY revenue growth for banks, the bottomline expanded 24 per cent YoY, despite credit costs staying in range. Auto sector reported 22/78 per cent YoY revenue/PAT growth. The sector is investing in EV and high value product mix and is showing signs of continued topline traction.

Other sectors

Pharma companies gained from lower cost of chemical supplies reporting a 35 per cent YoY  PAT growth on 10 per cent rise in  YoY  revenue. But chemical companies are bearing the burnt. Inventory destocking and deflation in chemical prices owing to weak global growth outlook continue to impact chemical companies. The sector reported a 9 per cent revenue decline and 33 per cent adjusted PAT decline.

FMCG  companies are passing on the lower commodity costs (edible oil, copra and others) and still improving gross margins. Revenue growth of 5.2 per cent YoY is despite the pass through of lower prices and marginal volume growth. The sector reported a 283 bps YoY improvement in gross margins as realisations delivered well above input costs. But with weaker volume growth, the rise in fixed overhead cost growth was left unabsorbed and EBITDA margins improved by only 80 bps YoY.

This trend of EBITDA margin expansion trailing GM expansion is applicable to India Inc on the whole as well, implying lower volume growth. But this was accentuated in FMCG sector. Nevertheless, India Inc improved on this metric from the previous quarter, implying a recovery in volume growth.

Outlook positive

India Inc continues to gain from a lower base of costs. But the benefit of such a low base will be exhausted by the March 2024 quarter. While the fact that volume growth is inching up recently can help, whether it will fully pick up into FY25 to make up the difference, needs to be seen. In such case, the current premium valuations may come under scanner. The balance sheet strength does offer a ray of hope. The current interest coverage ratio stands at a comfortable 4.4 times. Our recent analysis also showed that return metrics, margins and leverage fully support an expansion in financial leverage. Companies which can raise and deploy additional capital through debt and equity, in well-articulated capital investments will be able to justify the current high valuations across sectors.