Sectoral earnings dashboard: Auto takes the wheel, banks ride shotgun

Q1FY24 saw robust earnings growth led by government-owned oil & gas marketing firms, banks, autos, and finance & insurance, accounting for nearly 90 per cent of India Inc’s net profit surge over Q1FY23. In contrast, metals & mining, power, and Reliance Industries reported year-on-year declines. Overall profit growth stemmed from cost savings. Revenue slowed across sectors, except for banking and automotive. IT services, a growth driver, showed a revenue and profit slowdown, ranking third in net profit after banks and oil firms. Here’s Q1FY24’s top 10 sector earnings scorecard, presented by KRISHNA KANT, AMRITHA PILLAY, RAM PRASAD SAHU, SOHINI DAS, and SHIVANI SHINDE

BANKING

• First quarter (Q1) of 2023-24 (FY24) was great for banks, with a 67.5 per cent year-on-year (Y-o-Y) growth in net profit and a 34.7 per cent Y-o-Y growth in gross interest income

• Profit was driven by double-digit growth in retail loans, higher lending rates, and a sustained decline in provisions for bad loans

• Banks gained from higher treasury income due to a Y-o-Y decline in bond yields

• Operating expenses, including interest and salaries/wages, grew slower than banks’ overall income, boosting gross margins faster

• Banks’ operating expenses were up 21 per cent Y-o-Y in Q1FY24, against a 38.1 per cent Y-o-Y growth in their total revenue

• On the flip side, most banks experienced a contraction in net interest margins, which were up 42.3 per cent Y-o-Y, the fastest in over a decade

• Banks’ margins and earnings could come under pressure from faster growth in interest expenses and a sequential rise in non-performing loans

FINANCE & INSURANCE

• Non-bank lenders and insurance companies reported double-digit growth in earnings in the first quarter (Q1) of 2023-24 (FY24), driven by faster growth in loan books and higher revenue

• The combined net profit of non-banking financial companies (NBFCs) and insurers was up 52.9 per cent year-on-year (Y-o-Y) in Q1FY24, down from 191 per cent Y-o-Y growth in the fourth quarter of 2022-23

• Consumer lenders such as Bajaj Finance, Mahindra Finance, and Sundaram Finance were top performers in Q1FY24, while housing finance companies and life insurers were laggards

• Non-bank lenders continue to lose market share to commercial banks, raising a question mark over their earnings momentum

• The combined gross interest income for finance and insurance companies was up 22.4 per cent Y-o-Y in Q1FY24

• NBFCs’ earnings momentum faces risks from higher funding costs and rising delinquencies in the retail lending segment

• The Street remains bullish on retail non-bank lenders such as Bajaj Finance and Mahindra Finance

 

AUTOMOTIVE

• The automotive industry volume grew by 2.5 per cent year-on-year (Y-o-Y) in the first quarter (Q1) of 2023-24 (FY24), led by strong domestic sales

• While the passenger vehicle segment saw domestic growth, in the case of two-wheelers, domestic growth was offset by a Y-o-Y drop in exports

• Sequentially, two-wheeler exports showed signs of improvement; for example, Bajaj Auto saw a 12 per cent quarter-on-quarter step-up in export volumes

• Three-wheelers have been on a strong trajectory, up more than 50 per cent Y-o-Y during Q1FY24

• As commercial vehicles (CVs) saw some pre-buying in the fourth quarter of 2022-23 ahead of the Bharat Stage-6.2 emission norms kicking in in April, CV sales fell 4 per cent in Q1FY24

• Most automotive original equipment manufacturers increased prices, and thus the higher average selling price aided margins Y-o-Y

• A correction in raw material prices over last year’s high base led to higher gross margins

• The rupee’s depreciation against the dollar is a positive for Bajaj Auto and TVS Motor Company, while the Indian unit’s depreciation vis-à-vis the euro assisted in Tata Motors-Jaguar Land Rover profitability

FAST-MOVING CONSUMER GOODS

• Revenue growth for fast-moving consumer goods (FMCG) majors ranged from mid-single to double digits, with Nestlé leading the pack

• Growth was volume-driven, and Godrej Consumer Products outperformed peers on this metric. Paint companies stood out as a category with double-digit growth on a high base

• While rural markets still lag urban markets, the gap has shrunk, and both segments have reported good growth

• With raw material prices cooling off and price hikes taken earlier, most companies reported an expansion in gross profit margins

• Lower raw material prices have resulted in smaller players getting aggressive, and given the higher competitive pressures, advertising spending by consumer majors saw double-digit growth both year-on-year and sequentially, according to Nuvama Research data

 

INFORMATION TECHNOLOGY SERVICES

• The impact of global uncertainty was evident on the 2023-24 (FY24) first-quarter (Q1) performance of the Indian information technology services sector, with the biggest damper being Infosys slashing its revenue guidance, which pulled down the stock performance of the sector as well

• Demand for technology continues, as most players reported strong deal pipelines. Tata Consultancy Services’ total contract value (TCV) was up 24 per cent year-on-year (Y-o-Y), while Infosys’ TCV was up 36 per cent Y-o-Y

• Revenue growth, for both mid- and large-cap players, in Q1FY24 was softer than expected due to macroeconomic uncertainty and discretionary projects on hold, even as the deal pipeline was strong

• Weak top lines impacted profitability. Employee costs continued to put pressure but are expected to ease out in the second quarter

• Two of the largest components of the sector — banking, financial services and insurance as a segment and the US as a region — showed weakness

• Attrition declined for companies across sizes; there were no proportionate hiring targets

 

PHARMACEUTICAL

• Performance was aided largely by strong sales and launches in the US market. Drug shortages in the US market also helped augment revenue

• Less price erosion in the US market, which was in the high single digits as against low double digits in 2022-23, also helped

• The domestic market felt the impact of weak monsoons, which affected acute therapy sales. The impact of price control on drugs was also evident

• Sun Pharmaceutical Industries, a leader in the Indian market, admitted to price control diluting its performance in the home market

• Companies have been taking action to overcome regulatory woes with the US Food and Drug Administration; Cipla, for example, has taken a two-site strategy for its key respiratory assets

• Sequentially, the profit margins improved off the back of strong US sales and reduced costs of raw materials and freight

RETAIL & CONSUMER

• Retail companies posted healthy double-digit revenue growth, led by store network expansion, a rise in footfall, and demand in the staples category

• Even as gross margins for some companies expanded, operating profit margins for most saw a correction year-on-year and sequentially due to seasonality, a weaker mix, and other costs

• In the quick-service restaurant business, except for Westlife Foodworld, most companies reported muted same-store sales growth, which, coupled with higher investments, crimped their profits

• In consumer durables, high competitive pressures and unseasonal rainfall impacted sales in categories such as room air conditioners. Margins may be capped as companies vie for a slice of the market-share pie

• Most apparel majors witnessed a miss on the revenue front due to seasonal impact, a slowdown in apparel retail, and overall discretionary spending

 

OIL & GAS

• State-run oil-marketing companies’ profitability gained from improvements in marketing margins, particularly retail. The first quarter (Q1) of 2023-24 (FY24) was a ‘back in black’ quarter after reporting losses in the quarter gone by

• Reliance Industries’ oil-to-chemicals (O2C) division saw earnings taper off after an exceptionally strong year-ago quarter of all-time high margins. The dip in the O2C division’s earnings was partially offset by improved performance of the consumer businesses — retail and digital

• Weakness in the petrochemical business also weighed on GAIL (India)’s Q1FY24 profit numbers

• Oil and Natural Gas Corporation’s India business suffered from lower oil prices and output, leading to lower profits on a standalone basis

• City-gas distribution companies reported seasonal weakness in the industrial and commercial segment volumes. Margins for Mahanagar Gas improved despite muted volume growth on the back of lower gas costs and improved realisations

CAPITAL GOODS & INFRASTRUCTURE

• Port sector revenues gained from higher cargo volumes, with improved realisations lifting profitability. Adani Ports and Special Economic Zone reported its highest-ever quarterly cargo volumes at 101.4 million tonnes, with container cargo growth leading at 15 per cent year-on-year

• Profitability improved for capital goods companies with increased order execution and a cooling-off of raw material prices. Larsen & Toubro’s margin performance in the infrastructure segment, though weak, reeled from the impact of orders won during the pandemic when commodity prices were lower

• Power Grid Corporation of India’s profit was impacted by lower income and a decline in interest on the differential tariff compared to a year ago. Revenue from consultancy services also dipped as certain government projects in the Northeast drew to a close

• NTPC’s profitability rose on the back of a rise in its regulated equity base

METALS & MINING

• India’s operations for cement and steel makers gained from robust demand and higher volume

• The cement industry’s first-quarter (Q1) of 2023-24 (FY24) volumes are estimated to be up 10 per cent year-on-year (Y-o-Y), with bigger players such as UltraTech and Shree Cement outperforming industry growth. However, gains from better cement volume were partially offset by the higher cost of fly ash and slag

• Earnings for base metal makers remained under pressure as macroeconomic (macro) headwinds moderated prices. Hindalco’s US subsidiary Novelis volumes in the beverage can segment were down Y-o-Y due to the destocking impact. India’s aluminium business also reported the impact of unfavourable macros and subdued volumes on Q1FY24 earnings

• India’s steel consumption was robust, up 10.2 per cent Y-o-Y in Q1FY24. JSW Steel also gained from better export realisations and improved performance at its US and Italian facilities. Tata Steel’s profitability was hit on account of weakness in European operations

LTP: Loss to profit; NA: Not available; PBIDT:  Profit before interest, depreciation, and tax. Source: Capitaline; Compiled by BS Research Bureau