Home / Politics / Domestic demand helps companies sail through in Apr-Jun

NEW DELHI, WEAKENING RUPEE, RECESSIONARY CONCERNS, EXPORT MARKETS, COMMODITY PRICES : Geopolitical issues, a weakening rupee, recessionary concerns across developed markets and high commodity prices had a bearing on the June quarter performance of India Inc., said experts.

While margins of companies focused on the domestic market was impacted by high raw material prices, those having exposure to global markets were hit by geopolitical uncertainties, they said.

With declining commodity prices, domestic-focused companies are likely to heave a sigh of relief, and will expect earnings visibility to improve from the second half of the fiscal on the back of improving domestic demand and a strong economic recovery.

The concerns, nevertheless, remain elevated for companies having exposure to the export markets, with global headwinds, such as currency volatility, weakening demand, and geopolitical uncertainties, likely to impact their near-term prospects.

“The biggest surprise was domestic demand, which has been stronger than anticipated. Rural has started showing some green shoots of growth revival," said Manish Jain, fund manager, Coffee Can PMS, Ambit Asset Management. It was quite unanticipated, he added. The other has been the strength in loan growth in Q1, especially in the retail book, despite rising interest rates.

While banks were outperformers in Q1, IT services were the biggest laggards, said analysts. Jefferies India Pvt. Ltd said earnings growth was driven by a strong performance by capital goods, financial, consumer and auto firms. Cement, pharma and IT services firms witnessed year-on-year declines.

According to Motilal Oswal Financial Services, profit for the companies under their coverage universe grew 12% from the year ago. However, excluding banking, financial services and insurance (BFSI), profit was flat.

Consumer-focused companies had a decent quarter, with inflation-led price hikes leading to revenue growth. Their operating performance, however, did see some impact of higher input costs.

Easing input cost pressures, festive season sales and further rural recovery after the monsoon, may help firms grow in the second half of FY23.

“We expect strong demand in 2Q considering early Diwali and sustained pent-up demand from the urban middle class in discretionary segments," said analysts at Prabhudas Lilladher. The third quarter will benefit from improvement in margins, considering that cost pressures are abating as most agri commodities (led by palm oil) have corrected to March levels and crude has softened from the recent highs by 30-40%, analysts added.

Most managements, too, have indicated that recent input price corrections should drive a margin recovery in 2HFY23, which should coincide with a pickup in demand, analysts said.

As the benefit of the moderation in commodity prices starts to accrue in 2HFY23, analysts expect consumer, autos and cement sectors to contribute, too. However, the outlook for IT services remains challenging. The stronger dollar is a positive, but weakness in other currencies, such as euro and pound, are diluting the benefits.

Ujjval Jauhari
Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
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