Non-BFSI companies' net profits shrink sharply for second quarter

Banks account for most of incremental growth in India Inc earnings

Corporate results for October-December 2022 (Q3FY23) suggest a sharp slowdown in economic activities in non-financial services, including manufacturing.

On costs, companies got some respite from rising prices of commodities and energy but these gains were offset largely by faster growth in interest expenses. A combination of slowdown in revenue growth and a faster rise in expenses adversely affected the earnings of non-BFSI (banking, financial services, and insurance) companies.

In contrast, a rise in the interest burden for India Inc translated into an earnings bonanza for lenders, especially banks. The third quarter was the best for banks in at least four quarters and they accounted for most of the incremental growth in corporate earnings in the period.

Net sales growth for listed companies excluding banks, finance, insurance, and stockbroking declined to an eight-quarter low of 17.1 per cent year-on-year (YoY) in Q3FY23, down sharply from the 29.2 per cent in Q2FY23 and 28.4 per cent in the third quarter of FY22.

The combined interest expenses for non-financial companies were up 22.8 per cent YoY in Q3FY23, growing at the fastest pace in at least the last 17 quarters. For comparison, there was a moderation in their raw material costs, which grew 20.7 per cent YoY in Q3FY23, slower than the 41.3 per cent YoY a year ago and 43 per cent YoY in Q2FY23.

The combined net profits of 2,790 listed companies (ex-BFSI) were down 14.2 per cent YoY to around Rs 1.49 trillion in Q3FY23 from Rs 1.74 trillion a year ago. In comparison, these companies’ combined net profits were down 23.8 per cent YoY in Q2FY23 to Rs 1.39 trillion.

Listed banks’ combined gross interest income was up 25.2 per cent YoY, up sharply from 3.5 per cent growth a year ago and the best in at least the last 17 quarters.

Similarly, the combined gross interest income of non-bank finance companies (NBFCs), including insurance, was up 16.4 per cent YoY in Q3FY23, a sharp turnaround from a 2.3 per cent YoY contraction in the third quarter of FY22. This was the best showing by finance companies in the last seven quarters.

Faster growth in the top line also reflected in the lenders’ earnings. Banks’ combined net profits were up 42.7 per cent YoY to a record high of Rs 67,943 crore in Q3FY23. They were up from Rs 47,603 crore a year ago and Rs 61,037 crore in Q2FY23.

In the same vein, NBFCs’ combined net profits reached a new high of Rs 26,653 crore in Q3FY23, up 35.4 per cent YoY against Rs 19,687.4 crore a year ago and Rs 22,844 crore in Q2FY23.

However, the combined net profits of all 3,344 listed companies in the Business Standard sample were up 1.1 per cent in Q3FY23 to Rs 2.44 trillion against Rs 2.41 trillion a year ago and Rs 2.23 trillion in Q2FY23. The listed companies’ combined net profits in the third quarter were, however, 9.5 per cent lower than the record high Rs 2.7 trillion in Q4FY22.

Analysts expect a further slowdown in corporate growth in the fourth quarter.

“The net sales growth for non-BFSI companies is expected to decline to 8-10 per cent YoY in Q4FY23, given the end of post-Covid pent-up demand and macroeconomic factors such as continued contraction in India’s foreign trade,” said Dhananjay Sinha, director and head research & strategy, at Systematix Institutional Equity.

He expects net profits to remain under pressure, given rising interest rates and a recent rally in the prices of industrial metals and crude oil. Economists expect this to adversely affect India’s GDP growth.

“A decline in profit is important as GDP calculations, for several sectors use value added where a big component is profit before depreciation interest and taxes (PBDIT). This will have a bearing on Q3 GDP numbers,” wrote Madan Sabnavis, chief economist, Bank of Baroda.