Q2 earnings review: Topline growth slows further, margins improve

The overall revenue growth, which remains slow, was largely courtesy of the banking, financial services and insurance, or BFSI, sector. (Mint)
The overall revenue growth, which remains slow, was largely courtesy of the banking, financial services and insurance, or BFSI, sector. (Mint)


  • The September-quarter earnings season was a mixed bag with muted topline growth and zooming profits. The bottomline growth was thanks to ebbing cost pressures and recovering margins

The July-September earnings season ended on a mixed note with slowing expansion in revenue even as profit growth remained robust. AMint analysis of 3,559 BSE-listed companies showed that their combined bottomline had soared: aggregate net profit grew nearly 36% year-on-year (y-o-y), as compared with a 32% rise in the June quarter. On the flip side, topline growth has been slowing for five quarters, tapering off to low single digits in the September quarter.

That growth, too, was courtesy banking, financial services and insurance (BFSI) firms. Excluding that sector from the sample, revenues contracted 1.6% and 0.8% in the June and September quarters, respectively, on a y-o-y basis. Net profit of this sub-sample was up 40% in the last quarter.

While banking firms have held up corporate earnings through their healthy business growth and improving asset quality, oil and metal firms were responsible for the downward drag. Excluding them, topline growth swelled to almost 11%. “Topline growth for the quarter came in muted largely led by decline in commodity prices in metals and oil and gas space," said Pankaj Pandey, head of research, ICICI Securities.

Small-sized companies (revenue less than 500 crore) were the hardest hit, with 1.3% and 20% declines in revenues and profits, respectively. Revenues of large- and mid-sized firms rose nearly 5% and 5.6%, respectively, while their profits rose 4.9% and 5.6%.

Sectoral show

From a volume perspective, the sectoral show was again a mixed bag. Apart from robust growth in the BFSI segment, the hospitality, construction and real estate, and auto sectors exhibited healthy performance on a y-o-y basis. But some consumption-led segments were weak: consumer durables’ revenues shrank 4%, while fast-moving consumer goods (FMCG) registered just a 5% growth. “Listed consumer FMCG and durables companies are facing heightened competitive intensity," said Jitendra Gohil, chief investment officer, Kotak Alternate Asset Managers Ltd.

Pandey said the muted topline performance, especially in consumer-facing companies, was also a function of the shift in the key festive Diwali season from October last year to November this year. This moved the festive inventory build-up to October, instead of September last year. Weakness in the export market for segments such as information technology, and destocking in the chemicals sector also contributed to the weaker revenue growth, added Gohil.

Abating pressures

The pain on the expenses front appears to be subsiding. The combined total expenses of the firms in the sample, as a per cent of revenues, dropped nearly 650 basis points (bps) in the last one year, while declining 73 bps since the June quarter. Total expenses had peaked to 77.3% of overall revenues in the September quarter of the previous fiscal year. A sharp deflation in raw material prices (for non-finance companies) has also helped as this expense head slid from a high of 41% of revenues in the June quarter of 2022-23 to 37.4% now.

Other cost heads such as employee expenses have remained almost stable the previous four quarters, at an average 8.5% of revenue. Moving ahead, higher domestic capacity utilisation levels should help as cost absorption improves, said Gohil. “We expect robust performance in Q3 and Q4 due to the festive season and government spending ahead of the elections," he said.

Margins recovery

The healthy corporate earnings were largely supported by a steady rise in the margins over the previous four quarters. The aggregate operating margin of the companies in the analysis reached at least a nine-quarter high of 29.3% in the September quarter, and expanded 6.5 percentage points since the corresponding quarter of the previous fiscal year. Net profit margins rose 234 bps during the period. 

“Margin recovery is encouraging and is largely driven by softer commodity prices with most of the companies witnessing healthy gross margin expansion," Pandey said. 

“In H1FY24 the operating margins were 19% on a base of ~15-16% for H1FY23, so the margin expansion was around 300-400 bps y-o-y. Going forward, with margins of ~17% in H2FY23, we expect corporate earnings growth to sustain in H2FY24. However, the expansion will be moderate at around 200 bps y-o-y," he added.

For the coming quarters, analysts are upbeat on the corporate earnings trajectory, with increased infrastructure push from the government expected to boost economic activity. But they are also cautious on the consumption cycle with worrying signals from the job market.

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