Q2 results: Early birds show sharp decline in corporate earnings

Combined net of 441 firms up 5.8% YoY, slowest growth rate in 9 qtrs

The early-bird results of companies in July-September 2022 (Q2FY23) suggest a slowdown in corporate earnings and the end of the post-pandemic boom in India Inc’s margins and profits.

Corporate revenues, however, continue to grow in high double digits, thanks to the combined effects of higher inflation, high credit growth, and currency depreciation. The combined net profit of 441 early-bird companies in the Business Standard sample was up 5.8 per cent year-on-year in Q2FY23, growing at the slowest pace in the last nine quarters.

In comparison, these companies’ combined net profit was up 27.4 per cent Y-o-Y in Q1FY23 and 21.9 per cent Y-o-Y in Q2FY22. These companies reported a combined net profit of around Rs 1.2 trillion in Q2FY23, down from Rs 1.25 trillion in Q1FY23 and the lowest in the last four quarters (see charts).

As a result, the operating margin in Q2FY23 at 26.7 per cent (of revenues) was the lowest in the last 10 quarters while the net profit margin at 9.9 per cent in Q2FY23 was the lowest in the last nine quarters.

The combined revenues, or the income of the early-bird companies, were up 23.7 per cent Y-o-Y in Q2FY23 to reach Rs 12.13 trillion. For comparison, these companies’ combined revenues were up 26.5 per cent Y-o-Y in Q1FY23 and 24.2 per cent Y-o-Y in Q2FY22, respectively.

Banks and finance companies were the top performers during the quarter and accounted for most of the incremental growth in overall corporate earnings in Q2FY23. The combined net profit of 18 banks in our sample was up 60.1 per cent Y-o-Y to record a high of Rs 37,672 crore in Q2FY23.  

Similarly, the combined profit of finance companies, including insurance, asset management and stock broking, was up 13.8 per cent Y-o-Y to record a high of Rs 11,806 crore in Q2FY23. It was, however, a tough quarter for non-finance companies.

The combined net profit of early-bird companies ex-BFSI (banks, finance, insurance and stock broking) was down 11.4 per cent Y-o-Y to Rs 70,358 crore in Q2FY23, the lowest in the last eight quarters. This was the first Y-o-Y decline in the combined earnings of non-finance companies in the last nine quarters.

Mining, metals, cement, oil and gas, and consumer durable companies were the biggest laggards during the quarter and most firms in these sectors reported a sharp decline in net profit and even net loss due to a combination of lower sales realisation and high operating costs.

JSW Steel, the country’s second-biggest steel manufacturer, reported a net loss of Rs 915 crore in Q2FY23 against a net profit of Rs 7,179 crore in Q2FY22. Other companies to report a net loss in Q2FY23 include Mangalore Refinery and Petrochemicals (MRPL), Tata Steel Long, JSW Ispat Special Products, and Finolex Industries.

IT services exporters such as Tata Consultancy Services, Infosys and HCL Technologies, however, surprised on the upside with a quarter-on-quarter rise in operating margins and faster growth in rupee revenues, thanks to gains from currency depreciation.

The combined net profit of IT services companies was up 7 per cent Y-o-Y in Q2FY23, better than the 2.3 per cent Y-o-Y growth in earnings in Q1FY23. These companies’ combined net sales were up 20.2 per cent Y-o-Y in the second quarter, marginally better than the 20 per cent Y-o-Y growth reported in Q1FY23.

Analysts expect a further slowdown in corporate earnings and revenue growth in the second half of FY23.

At the macro level, the big bump-up in India Inc earnings in the post-pandemic period was driven by cyclical sectors such as mining and metals, oil and gas, and banks and financial firms, and these tailwinds are now receding, putting pressure on overall corporate earnings.