Q1FY24 Hits & Misses

After hitting a record high in the last quarter of FY23, compared with their poor showing in the previous two quarters of the financial year, the first quarter of FY24 has started on expected lines. India Inc.’s earnings for the quarter ended June 2023 are yet to cross the halfway mark and have largely remained as per market expectations with no major surprises 

The equity market has been under the firm control of bulls since the beginning of the financial year. Week after week, the equity indices have been scaling new heights, often reaching multiple milestones within a single week. For instance, in the last 17 trading sessions ending on July 21, the Nifty 50 achieved a lifetime high on 11 occasions. Currently, it stands tantalisingly close to the 20,000 mark, with a recent high of 19,991.8 on July 20. Similarly, the Sensex also touched the remarkable milestone of 67,000. 

Since the start of April 2023, major indices like Sensex and Nifty have experienced growth in the lower teens, while the broader equity indices based on Mid-Cap and Small-Cap companies have surged in the twenties, all the way until July 21. Despite the significant uptrend in the indices, the current valuation of the stock market seems relatively reasonable. On July 21, the price-to-earnings ratio (PE) of the Nifty was recorded at 23.96 times, which is lower than its five-year average of 26.43 times and its ten-year average of 24.34 times. These figures indicate that the market’s current pricing is somewhat favourable, despite the bullish run. Analyst and market participants believe that it will remain buoyant even in the second half of 2023.

Results at a Glance

There are various reasons why stocks are trading higher and one of the reasons is the better performance by India Inc. After hitting a record high in the last quarter of FY23, compared with their poor showing in the previous two quarters of the financial year, the first quarter of FY24 has started on expected lines. India Inc.’s earnings for the quarter ended June 2023 are yet to cross the halfway mark and have largely remained as per market expectations with no major surprises. The results indicate that global macroeconomic conditions and inflation are not causes of concern as they were in the last quarter of FY23. The numbers for Q1FY24 so far show the banking sector in the lead with IT firms reporting subdued numbers while FMCG firms exhibit a positive to mixed trend. Automobile and cement firms, meanwhile, have posted in-line performances. 

Let’s take a look on an aggregate basis the results of some companies. Until July 24, almost 272 companies had announced their results, reflecting a positive growth trend on almost all the financial parameters. Revenue growth on a yearly basis registered 11.815 per cent, indicating a robust expansion in top-line figures. Furthermore, the net profit growth displayed strong resilience, recording an impressive 13.38 per cent increase in the same period. The operating profit growth on a yearly basis surged an encouraging 19.755 per cent. This was on the back of cooling of the commodity prices and was also reflected in the operating profit margin growth of 3.32 per cent, signifying improved efficiency. In terms of number of companies that have reported progress in their financials, there are 185 entities. 

This signifies a broader positive sentiment prevailing across the market with businesses showcasing resilience amidst various economic challenges. Conversely, 87 companies have announced negative results. The table presents the aggregated performance of companies from various industries in their Quarterly Results, showcasing the year-on-year (YoY) and quarter-on-quarter (QoQ) growth figures. Among the top five performers in terms of net profit, the finance industry, which includes companies from sectors such as NBFC and asset management companies among others, stands out remarkably well, recording an outstanding 77 per cent YoY growth and a substantial 27 per cent QoQ growth in net profit. 

The impressive performance of the finance industry is followed closely by the trading sector that consists of companies such as Redington Ltd., MMTC and Adani Enterprises, which have achieved a remarkable 66 per cent net profit growth on a yearly basis along with an exceptional 108 per cent net profit growth on a sequential basis. The banking sector secured 52 per cent net profit growth YoY while showing a 2 per cent decline on a QoQ basis. On the other end of the spectrum, two industries faced significant challenges in their net profit performance. 

Meanwhile, the textile industry continues to experience a substantial 60 per cent decline in net profit on a YoY basis while also grappling with a 41 per cent decline on a QoQ basis. The media and entertainment sector struggled with net profit growth on yearly basis but managed to display resilience in the short term with an impressive 92 per cent net profit growth on a QoQ basis, indicating a potential turnaround in the industry. The rise in earnings, however, is exclusively led by banking, financial services and insurance (BFSI) companies. A betterthan- expected showing by banks and non-bank lenders in Q1FY24 more than compensated for the earnings contraction in the non-BFSI space.

Banks 

The first quarter of the financial year for banks has seasonally been a weak quarter. Despite this, banks have started the financial year FY24 on a very positive note, posting an impressive quarter in Q1FY24. Overall, on an average the banks have posted 30 per cent growth in top-line on a YoY basis. Meanwhile, the operating profit of the banks has surged 35 per cent and PAT has increased by 50 per cent. As regards revenue growth, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Bank of Maharashtra and Federal Bank have delivered strong growth in revenues. In profitability terms, Union Bank of India, Central Bank of India, South Indian Bank and RBL Bank have delivered impressive growth in PAT. 

In Q1FY24, the NII and NIMs also saw decent improvement for most of the banks. The results were led by strong credit growth (retail portfolio), improving asset quality and deposits. The deposits’ growth was led by a factor of discontinuation of ₹ 2,000 notes during the quarter. In Q1FY24, the asset quality of banks remained stable with lower slippage ratios and a decent rate of recoveries. According to report by CareEdge Ratings, improvement in asset quality is led by “moderation in slippages, appropriate PCR levels resulting in lower incremental credit costs, sustained high bank credit off-take, corporate deleveraging leading to improved financials, a declining trend in legacy GNPAs and sustained retail GNPA levels in spite of high levels of unsecured loans.” 

The report further states that the SCB GNPA ratio could improve from 3.96 per cent in FY23 to 2.90-3.05 per cent by FY24 end. In its meeting of June 2023, the Reserve Bank of India (RBI) decided to keep its repo rate unchanged at 6.5 per cent. This marks the second consecutive time the RBI has refrained from raising the rate, attributing it to the easing pace of inflation and optimistic projections of economic growth. If we compare the top 10 banks on the basis of revenue, this has increased by about 70 per cent and PAT has increased by more than 100 per cent, which implies that the banks have had a strong quarter.
 

Finance 

Till now finance companies have given the best financial results when it comes to net profit growth and operating profit growth on a yearly basis. For instance, PNB Housing Finance Ltd. saw its total quarter revenue surging impressively by 20.9 per cent. Concurrently, the operating profit for the quarter also exhibited significant growth at 20.2 per cent, while net profit witnessed exceptional growth, recording a substantial 47.8 per cent increase. Poonawalla Fincorp Ltd. too reported a robust set of numbers. The company saw its highest ever quarterly disbursements at ₹ 7,063 crore, up 143 per cent YoY and 11 per cent QoQ. Its assets under management (AUM) at ₹ 17,776 crore were also up 41 per cent YoY and 10 per cent QoQ. Some of the other industry majors are yet to report their numbers, including Bajaj Finance. The expectation is that these numbers shall be impressive.
 

Information Technology

The Indian IT sector displayed a subdued start in Q1FY24. The revenue of the top 10 IT companies stood at ₹ 2,126,845.81 crore, which grew by 3.30 per cent YoY. The operating profit of the companies grew by 13.35 per cent, which stood at ₹ 186,426.06 crore. The profit after tax of the companies grew by 6.44 per cent. The clients of the IT companies have put on a hold on their discretionary spending and because of this the IT sector has taken a small hit in growth in revenues. Macroeconomic weakness across the US and Europe has led to cautious technology-related spending and outsourcing with cost optimisation. 

The BFSI segment in which the IT sector operates saw technology budget cuts and pressures on IT vendors for cost reductions by leading banks in the US and Europe. This recent banking crisis in the US has also led the banks to focus on costs until the emergence of a better economic environment. However, the long-term IT services’ demand outlook is positive due to growing technology adoption in the wake of the pandemic. The near-term growth in IT companies has taken a hit due to macroeconomic pressure in key economies. The cautionary environment reprioritises spending, leads to cost optimisation, tightens scrutiny and delays approval cycles. 

As per our Q1FY24 result analysis, Persistent Systems Ltd. had the strongest revenue growth of 23.59 per cent (YoY) among the top 10 IT companies and Coforge Ltd. also saw a 21.41 per cent increase in revenues. Mphasis Ltd. delivered a weak quarter with a 4.67 per cent decline in revenue. In terms of profitability in the top 10 IT companies, Zensar Technologies Ltd. delivered 108 per cent growth in PAT YoY while Mphasis Ltd. delivered 1.5 per cent decline in PAT YoY. The performance in Q1FY24 was broadly in line and as per the market estimates. Infosys Ltd.’s management has lowered revenue guidance while other IT companies have remained confident about meeting the guidance.
 

Auto & Auto Ancillary 

India holds the distinction of being the largest tractor producer, the second-largest bus manufacturer, and the third-largest heavy truck manufacturer globally, with a remarkable annual production of 22.93 million vehicles in FY22. The Indian passenger car market is expected to achieve a milestone, reaching USD 54.84 billion by 2027, exhibiting a promising compound annual growth rate of 9.5 per cent. Notably, the electric vehicle (EV) market is also witnessing a significant surge, projected to reach 50,000 crore (USD 7.09 billion) by 2025. 

While most of the auto companies are yet to announce their results, we have analyzed the financial performance of a few who have already disclosed their reports. Among the top companies in the automobile sector, robust year-on-year growth has been observed. For instance, Ashok Leyland reported a noteworthy 14.42 per cent increase in net sales, amounting to ₹ 9,651.53 crore, as compared to ₹ 8,434.86 crore in the corresponding quarter of the previous year. Furthermore, the net profit also surged remarkably by 2,460.17 per cent, reaching ₹ 582.95 crore, in contrast to ₹ 22.77 crore in the same quarter of the preceding year. Similarly, GNA Axels, an auto ancillary company, experienced a slight decline in net sales by 2.54 per cent quarteron- quarter (QoQ) to ₹ 374.02 crore while maintaining stability on a yearly basis. The company's net profit stood at ₹ 33.13 crore, registering a 2.61 per cent decrease QoQ but a notable 22.58 per cent increase YoY. 

In addition to the major players, small-cap companies like Steel Strip Wheels and Rajratan Global Wires have also disclosed their financial results. For Steel Strip Wheels, consolidated net sales exhibited an encouraging climb of 3.93 per cent year-onyear, amounting to ₹ 1,044.40 crore, up from ₹ 1,004.93 crore in the previous year's corresponding period. The net profit reached ₹ 47.60 crore, marking a slight rise of 0.63 per cent over the previous quarter. However, Rajratan Global Wires faced a decline in performance across all its key financial parameters, largely attributed to the impact of its International business performance.

Healthcare 

Results for Q1FY24 from most of the companies operating in this sector are awaited but small-cap companies like Jubilant Pharmova and Aarti Drugs have declared their results. In Q1FY24, on a consolidated basis, Jubilant Pharmova’s net revenue increased by 8.75 per cent YoY to ₹ 1,566.5 crore compared to ₹ 1,440.5 crore from the previous year’s same quarter. On a sequential basis, the revenue decline by 5.68 per cent. Net profit stood at ₹ 7.4 crore compared to ₹ 46.9 crore, a YoY decrease of 84.22 per cent. On a sequential basis, the net profit increased by 106.31 per cent. In Q1FY24, on a consolidated basis, Aarti Drugs’ net revenue increased by 6.29 per cent YoY to ₹ 661.11 crore compared to ₹ 621.96 crore from the previous year’s same quarter. On a sequential basis, the revenue declined by 12.30 per cent. Its net profit stood at ₹ 47.97 crore compared to ₹ 34.78 crore, a YoY increase of 23.70 per cent. 

Overall, the healthcare industry’s YoY performance showcases growth with sales witnessing a 23 per cent increase, operating profit registering a substantial 29 per cent growth and net profit displaying a commendable 32 per cent rise. Despite facing a slight decline in sales on a QoQ basis at 2 per cent, a modest 9 per cent decrease in operating profit was visible. Notably, the net profit shows remarkable strength by recording a noteworthy 22 per cent growth on a QoQ basis. Companies from the pharmaceutical sector are likely to post better numbers on the back of benefits from a visible ramp-up in the launch of ‘gRevlimid’ capsule in the US by multiple Indian peers, softening of input and freight and energy cost and depreciation in the Indian rupee.

Conclusion

The Indian economy is currently in the Goldilocks scenario. The current domestic macroeconomic data including inflation, interest rate and GDP growth rate presents a positive outlook. This has helped corporate profitability to post robust growth. This trend indicates promising prospects for companies which are poised to capitalise on the long-term growth potential of the domestic market. The ripple effect of this growth is expected to extend across various sectors, offering significant opportunities for businesses. As a result, we anticipate the ongoing bullish market sentiment to persist. The valuations appear to be reasonably aligned with the potential for future earnings’ growth. 

The Indian economy is currently in the Goldilocks scenario. The current domestic macroeconomic data including inflation, interest rate and GDP growth rate presents a positive outlook. This has helped corporate profitability to post robust growth.