Analysis of Strong Double-Digit Earnings Growth for India Inc. in Q3 – Sectoral Impact and Stock Investing Implications
Source and Citation: News article from Economic Times published on Jan 22, 2024
Analysis for Layman
The article delves into the trends observed in the initial Q3 results of 215 companies, highlighting a robust double-digit expansion in revenue and net profit for India Inc. Revenue grew by 11.2% year-on-year, and net profit jumped by an impressive 14.2%.
This growth is primarily attributed to outstanding performances from lenders, including banks and non-banking financial companies (NBFCs) or financing firms. The banking sector witnessed a staggering 50.5% increase in revenue, with profits surging by an average of 39%. Similarly, NBFCs experienced a remarkable 33% growth in revenue and a 59% rise in profits.
However, when excluding lending firms, the broader earnings expansion for India Inc. has moderated, with 4.5% revenue growth and 6.8% profit growth. This suggests that economic conditions are stable rather than spectacular.
The analysis of margins reveals that the banking sector’s margins have dropped due to deposit rate hikes surpassing lending rate increases, indicating rising costs and inflationary pressures. Overall, corporate India’s operating profit margins remain healthy at 20.9%.
Impact on Retail Investors
For equity investors, the initial earnings trends convey essential insights:
Positives:
- Strong performance from the banking and NBFC sectors is beneficial for portfolio holdings in these areas.
- Public sector undertaking (PSU) banks with better margins and balance sheets are poised to outperform.
Considerations:
- Margin pressures emerging across sectors indicate that the peak profit cycle is likely over.
- Stocks with high valuations may face pressure, prompting a shift from high-growth bets to consistency compounders in sectors like autos, cement, and utilities.
While the outlook for lending stocks remains positive, it is advised to take profits in expensive names and add secular growers during market corrections.
Impact on Industries
Divergent Sectoral Trends:
- Banking – Public & Private: Robust credit growth and improving asset quality contribute to strong earnings, but deposit competition poses margin pressure risks.
- NBFCs/HFCs/Financials: A healthy retail credit demand environment aids sustained growth momentum despite rising rates.
- Autos, Capital Goods & Durables: Margin resilience is observed, benefiting from operating leverage and easing commodity costs, but the demand outlook is crucial.
- Oil & Gas and Commodities: Strong profits are supported by an elevated commodity supercycle, but peak cycle risks loom amid global slowdown worries and falling prices.
Overall, while financial services lead, a moderate growth outlook for commodities and manufacturing warrants selectivity.
Long Term Benefits & Negatives
Positives:
- Banking and retail credit growth signals economic vibrancy, emerging from post-pandemic challenges.
- Reflects the success of policy steps like PLI schemes and Make in India over the last few years.
Negatives:
- Peaking margins and cost pressures indicate an increasingly challenging operating environment.
- Global economic worries can impact export demand, as seen in the IT sector’s performance.
Investors need to balance long-term domestic growth drivers with near-term margin pressures. While the earnings cycle may have peaked, stability, rather than acceleration, is likely.
Short Term Benefits & Negatives
Positives:
- Healthy credit growth momentum continues, facilitating leadership in the banking and NBFC sectors.
Risks:
- Emerging margin pressures can constrain net earnings upside across consumer, auto, and commodity sectors.
- Global slowdown combined with high inflation shrinking disposable income poses volume growth risks in 2023.
While the lending sector’s prospects remain strong, stability is likely to return across broader markets. Investors should avoid extrapolating unsustainable past profit growth and high valuations, focusing on strong balance sheets offering consistency in a transitional year.
Companies Impacted by India Inc.’s Q3 Results
Indian Companies that Gain:
Large Private Banks: (HDFC Bank, ICICI Bank, Kotak Mahindra Bank) Strong lending growth and rising margins will likely boost profit and stock prices. Their diversified loan portfolios could mitigate pressure from rising deposit rates.
Non-Banking Finance Companies (NBFCs): (Bajaj Finance, HDFC Ltd., LIC Housing Finance) Increased demand for loans in sectors like retail and housing should benefit NBFCs. Their focus on secured loans might offer them protection during economic downturns.
Automobile Companies: (Maruti Suzuki, Tata Motors, Hero MotoCorp) Strong rural demand, new model launches, and lower commodity prices could lead to higher sales and profits. Increased loan availability from banks and NBFCs might further propel demand.
Capital Goods Companies: (L&T, ABB India, Siemens India) Rising investments in infrastructure and manufacturing might boost demand for capital goods. Government spending on infrastructure projects could be a key driver.
Fast-Moving Consumer Goods (FMCG) Companies: (Hindustan Unilever, ITC, Britannia) Rising rural income and stable demand for essential goods could lead to steady growth. Their strong distribution networks and brand recognition might provide an edge.
Indian Companies that Lose:
Interest-Sensitive Sectors: (Real Estate, Airlines, Power Companies) Rising interest rates could increase borrowing costs and impact profitability. Airlines might face additional pressure from high fuel prices.
Small & Medium Enterprises (SMEs): Tightening credit conditions and rising input costs could put pressure on SMEs’ margins and profitability. Increased competition from larger players might further squeeze their market share.
Export-Oriented Companies: (Textiles, Pharmaceuticals, IT Services) Global economic slowdown and trade disruptions could impact export volumes and revenues. Exporters facing high domestic input costs might be at a disadvantage.
Consumer Discretionary Companies: (Durables, Jewelry, Restaurants) Increased spending on essential items and reduced disposable income could impact demand for discretionary products and services. Higher operating costs might further squeeze margins.
Startups & Early-Stage Companies: Rising interest rates and tighter funding conditions could make it difficult for startups to raise capital and sustain growth. Some companies might face delays or cancellations of funding rounds.
Global Companies that Gain:
Foreign Institutional Investors (FIIs): Positive outlook on Indian economy and strong corporate earnings might attract FII investments into Indian equities. Diversification benefits of investing in India could be appealing.
Global Materials & Commodities Suppliers: Increased demand for commodities like steel, cement, and coal due to infrastructure spending and manufacturing growth could benefit mining and resource companies.
International Consulting Firms: Increased focus on infrastructure development and corporate restructuring might create opportunities for management consulting and professional services firms.
Global Technology Companies: Increased adoption of digital solutions across various sectors in India could benefit tech giants like Microsoft, Google, and Amazon. Cloud computing, cyber security, and automation solutions might see higher demand.
International Investment Banks & Asset Managers: Strong performance of Indian markets and increased deal activity could generate fees and revenue opportunities for global financial institutions.
Global Companies that Lose:
Global Consumer Goods Companies: Increased domestic focus and preference for local brands in India might impact some international FMCG companies. Rising import costs could further squeeze their margins.
Global IT Services Companies: Increased automation and focus on domestic talent in India could impact global IT services providers. Strong competition from Indian IT companies might put pressure on pricing and market share.
Global Airlines: Increased domestic air travel in India might benefit local airlines at the expense of international carriers. Lower fares on domestic routes could make it difficult for foreign airlines to compete.
Global Investment Funds Focused on Emerging Markets: Slower economic growth or policy uncertainties in India could lead to investors allocating funds to other emerging markets with better prospects.
Global Commodities Traders: Government intervention in commodity markets or price controls might impact the business of global traders dealing in oil, gas, and other resources.
Market Sentiment Impact:
Overall, the initial Q3 results are positive for Indian equities, particularly for banking, finance, and cyclical sectors. Strong earnings growth and resilience to rising interest rates could boost investor confidence and lead to further market gains. However, sectors sensitive to rising costs and the global slowdown might face headwinds. Global investors are likely to monitor the ongoing results season and economic data closely before making long-term investment decisions.
Please note: This analysis is based on the information provided in the news article and does not constitute financial advice. It is important to conduct your own research and due diligence before making any investment decisions.