Country Report

Corporate Profit Margins Remain Under Check in Q3 FY23

Published: March 3, 2023

The challenging economic and financial conditions continued to impact the earnings of the corporates in the third quarter of FY23. Although revenue growth continued in double digits, there was a significant decrease in pace. Despite an anticipated increase in demand during Q3 due to the festive and holiday season, net sales remained almost unchanged from the previous quarter. While there was some relief due to easing input costs, it was partially offset by an increase in interest and employee expenses. Interest costs surged by 23% (year-on-year) during Q3, while employee costs increased by nearly 13% (year-on-year). As a result, operating profit only experienced
marginal growth during the third quarter. On a positive note, both operating profit margin and interest coverage ratio improved sequentially but remained lower than a year ago. Among sectors, automobiles, IT, power, and capital goods witnessed strong double-digit growth in both sales and profitability whereas, crude oil, iron and steel, non-ferrous metals, cement and textile dragged on overall
This report presents a detailed analysis of the quarterly earnings results of a sample of 2,201 listed non-finance companies. The first gives a snapshot of the performance of these companies at the aggregate level. The subsequent sections delve into size-wise and sector-wise analysis of select indicators. The focus has been on 21 select sectors as listed in the annexure of this report.

Corporate Performance (Excluding BFSI) – Q3 FY23
A) Aggregate Analysis – Q3 FY23
Net sales in the third quarter grew at 14.7% (y-o-y), moderating from 25.5% growth in the previous quarter.
A major part of this growth in total revenue could be on account of higher realisations with some of the sectors passing on the high inpu costs to the final consumers. On a quarter-on-quarter basis, growth in net sales was muted at 0.6% in Q3 despite it being a seasonally strong quarter. The dampening effect of high inflation level on consumers’ purchasing power along with slowing external demand could have impacted the volume growth for some of the sectors.Notwithstanding the double-digit growth in net sales, growth in operating profit was muted at 0.5% (y-o-y). The sustained moderation of commodity prices helped ease the input price pressures on corporates. However,
rising finance and employee costs were the drags on corporates’ earnings and limited the upside in profitability. Financing costs for the corporates have accelerated in the past two quarters amid rising borrowing costs. In
Q3, interest expenses by the corporates surged by 23% (y-o-y) compared with a 2% decline witnessed a year
ago. At the same time, employee costs jumped by 13% (y-o-y), the highest increase in the last five quarters. Much of this was driven by the IT and automobile sectors. Overall, total expenses were still around 18% higher annually. However, on a q-o-q basis, total expenditure declined by 1.3% mainly supported by the easing of raw materials costs. This was reflected in a q-o-q growth of nearly 14% in operating profit of the firms despite a subdued sequential growth in total revenue. If we look at the financial ratios, some improvement was witnessed in Q3 compared with the previous quarter. The operating profit margin improved to 14.8% from 13% in the previous quarter. At the same time, interest coverage ratio also moved higher to 5.3 from 5 in Q2 FY23. However, an annual comparison shows that both
measures were lower compared to a year ago level.

B) Size-Wise Analysis – Q3 FY23
For analysing the performance of companies with respect to their size, we have classified them under three categories. Companies with an annual turnover of up to Rs 500 crore have been classified as micro and small, between Rs 500 crore to Rs 5,000 crore as medium and more than Rs 5,000 crore as large companies Large companies, which accounted for nearly 10% of the sample, continued to outperform micro, small and medium-sized companies. The double-digit growth in net sales in the third quarter was primarily driven by large companies whereas, for medium-sized companies net sales were almost flat at a year ago level. Despitedouble-digit growth in net sales for the large-sized companies, the operating profits were only marginally higher. Both medium and micro and small counterparts saw a fall in their profits. Large companies have the benefit of economies of scale which help them to rationalise their expenses, while for smaller companies, higher input costs could lead to scaling down of production. The profit margins across the three categories saw an improvement in Q3 FY23 but were still lower compared with a year ago level. As far as interest coverage is concerned, both large and micro and small enterprises saw a marginal improvement. For medium enterprises, the interest coverage ratio marginally declined to 4.1 in Q3 from 4.2 in Q2.

C) Sectoral Analysis – Q3 FY23
We have looked closely at 21 select sectors (details in Annexure) to get a sense of their performance in the third quarter. These sectors accounted for nearly 84% of the total turnover in Q3 FY23. Our analysis showed that, among the 21 select sectors, except textile, all other sectors posted positive annual growth in net sales in Q3. Sectors such as automobiles, power, IT, cement, and capital goods, among other, posted double-digit growth indicative of easing supply chains and growing economic activity. However, the impact of slowing external demand and easing commodity prices were visible for sectors such as non-ferrous metals, iron and steel and chemicals which grew at a much slower pace. The net sales for textile sector continued to witness contraction on a y-o-y basis for the second consecutive quarter. The uneven nature of demand recovery is reflected in the data on sales and profits as sectors such as aviation, hospitality and automobiles, dominated largely by urban demand, featured in the highest growth bracket. These sectors have also benefitted from high pent-up demand.

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