Little to cheer for in Q3 early bird results; non-BFSI companies lag

In the slow lane: 2.5% rise in profit the least in 10 quarters

The early bird results for Q3FY23 hint at a further slowdown in corporate earnings and revenue growth.

The combined net profit of 225 early bird companies across sectors was up 2.5 per cent year-on-year (YoY) in the third quarter of 2022-23 but this was the least increase in 10 quarters. These companies’ combined net sales in the October-December period were up 18.2 per cent — the most sluggish growth in seven quarters.

The firms in Business Standard’s sample reported a combined net profit of Rs 90,293 crore in Q3FY23, up from Rs 88,124 crore a year ago and Rs 80,161 crore in the previous quarter.

The BFSI (banking, financial services, and insurance) sector, especially banks, once again led earnings growth, aided by an improving credit offtake, higher interest rate, and stable asset quality. The combined net profit of BFSI companies in the early bird sample was up 25.6 per cent YoY —much better than the rest of India Inc but the smallest increase in five quarters. These companies reported a combined net profit of Rs 35,595 crore in Q3FY23, up from Rs 28,429 crore a year ago and Rs 31,618 crore in Q2FY23. Their gross interest income was up 24.3 per cent YoY in Q3FY23, growing at the fastest pace in at least four years.

The performance of non-BFSI companies was relatively muted. Their combined net profit was down 8.5 per cent YoY in Q3, the second consecutive quarter of a decline in earnings. These companies’ net sales were up 16.1 per cent YoY — the slowest growth in the past seven quarters.

Non-BFSI firms reported a net profit of Rs 54,698 crore in the December quarter, down from Rs 58,783 crore a year ago but up from Rs 48,498 crore a quarter ago.

“The post-pandemic surge in corporate revenues and profits was episodic and driven by unprecedented fiscal and monetary stimulus by major economies. This tailwind has now ended and the macroeconomic environment has worsened, adversely affecting the corporate sector,” said Dhananjay Sinha, director and head research and strategy, Systematix Institutional Equity. 

He expects a further moderation in corporate revenues growth in Q4FY23 due to a slowdown in domestic and external demand.

“The YoY growth in net sales of non-financial companies is expected to moderate to 8 per cent in Q4, from around 16 per cent in the third quarter,” said Sinha.

One of the strongest headwinds for corporate earnings is the steady rise in interest expense, even as top line growth slows down. Interest expense in Q3 by early bird companies in the sample was up 27.8 per cent YoY, most in at least four years. Also for the first time in nine quarters, interest expense grew faster than companies’ net sales, thus weighing on corporate earnings.

The interest burden was even worse for companies in the manufacturing and service sector. The combined interest expense for ex-BFSI companies was up 32.6 per cent YoY in Q3FY23, showing the steepest rise in 15 quarters. In comparison, the combined Ebitda or operating profit of these companies was up 0.9 per cent YoY. Also for the first time in nine quarters, interest expense for non-BFSI firms grew faster than their net sales growth.

A growing mismatch between operating profit growth and interest expense also resulted in a steady decline in companies’ interest coverage ratio (ICR), which indicates their ability to service debt. The ICR for the early bird companies (ex-BFSI) narrowed to 11.4x in Q3FY23, from 15x a year ago and 11.8x in Q2FY23.

Analysts see the growing interest burden as a combination of the rise in interest and higher borrowing by corporations for working capital requirements. For example, Reliance Industries and JSW Steel -- two of the biggest companies in the early bird sample -- reported a jump in their gross and net debt in the third quarter.

On a brighter note, these early bird results suggest a moderation in input costs and a rise in the operating margin. The Ebitda margin for ex-BFSI firms improved to 19.4 per cent of total income in Q3FY23, from a five-year low of 17.4 per cent in Q2FY23. However, the margin was still down 270 basis points on a YoY basis.

The early bird sample is dominated by banks, IT services exporters, such TCS and Infosys, and Reliance Industries. The three industries/companies account for 87.5 per cent of the sample combined net profit. Given this, analysts expect the earnings picture to change as more manufacturing heavyweights declare their third quarter results in coming weeks.