Earnings of India Inc have not disappointed

Margins for banks have gone up thanks to increases in lending rates tracking the rapid rate hikes in the Reserve Bank of India’s (RBI) policy rates. (istock)
Margins for banks have gone up thanks to increases in lending rates tracking the rapid rate hikes in the Reserve Bank of India’s (RBI) policy rates. (istock)

Summary

Healthy macroeconomic fundamentals have underpinned their growth in the last quarter, but the possibility of El Nino and developed economies slipping into a recession pose risks

One worry that has troubled observers about Indian shares trading near their all-time peaks is that corporate earnings have seemed to lag. The earnings season just ended, however, would help allay some of those worries. India Inc’s report card for the three months ended 31 March has been good, with financials and automobile sectors featuring among the top performers. Margins for banks have gone up thanks to increases in lending rates tracking the rapid rate hikes in the Reserve Bank of India’s (RBI) policy rates. With bad loans down, bank balance sheets cleaned up and credit growing at mid-teen rates, money has been flying off bank counters in spite of borrowings getting costlier. Of course, deposit rates have been raised too, but they typically tail lending rates on the way up so that bank profitability isn’t hurt. With RBI keeping its eyes glued to inflation, a reversal in its policy may yet be far, which could enable a sustained outperformance for lenders.

Automobile sector earnings have been in high gear too as sales have been healthy while commodity prices have cooled. This has lowered input costs even as companies have raised prices. Further, with the chip shortages having eased, assembly lines have been functioning with fewer disruptions. However, global demand has been under a cloud. This has weighed on those focused on exports. Domestically, demand has been improving though, especially for premium products. The troubles in the rural economy have been a matter of concern, although a rise in two-wheeler sales holds out hope of a pick-up in demand. In addition, travel and tourism, and hotels too, had a healthy quarter aided by sustained post-pandemic demand. This also helped airlines, even as they benefited after Go First went into insolvency due to unrelated engine-related issues. Airfares on some key routes have spiked owing to high demand and limited seat availability. Add to it, oil prices have been stable, which should keep aviation turbine fuel costs in check. For now, the government has asked airlines to check fares by themselves. If it later deems a direct intervention necessary and imposes a fare cap, the good run could stumble. Still, with seat availability unlikely to rise soon, the outlook largely seems positive.

More broadly, prospects for corporate India are looking up thanks to an economy that has been defying the odds. The latest gross domestic product (GDP) data placed its expansion at 7.2% in 2022-23, which outdid the predictions of economists. For 2023-24, the Union budget has assumed nominal growth of 10.5%. By implication, expecting corporate earnings to grow by at least that much would be fair. Also, inflation is now within RBI’s comfort zone, but an El Nino effect could hurt farm output while the production cut by Saudi Arabia could stoke energy costs. There are also risks looming over the global economy, especially of the US and other big economies slipping into a recession. If these materialize, we could see corporate earnings take a hit. That may result in share valuations being downgraded. For now, though, given a stable macroeconomic environment, it’s possible they could hold strong. At a price-to-earnings multiple of 23, they may be trading higher than the average late-teen levels considered fair for India. But then, when the future looks promising, investors often are willing to look past buzz-kill numbers.

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