Margins lead growth in profits

Businessman analyzing company’s financial balance sheet working with digital augmented reality graphics. Businessman calculates financial data for long-term investment.

About 60 percent of all listed companies have published their financial statements for the quarter that ended on December 2023. The remaining 40 percent are expected to publish their statements in the next couple of days. SEBI regulations mandate that all listed companies must publish their financial statements within 45 days of the completion of the quarter. Evidently, most do so only towards the very end of this 45-day window.

The 60 percent that has published, the 2,823 companies, account for about 89 percent of the total sales generated by all listed companies. So, the aggregate trend of the performance of listed companies is reasonably clear from the available sample. Besides, the broad financial performance ratios have remained quite stable since the financial statements of the first 550 companies became available after the end of the third week since December 2023. Total income has grown year-on-year (y-o-y) by around 7 percent, net profit has grown by about 27 percent and net profit margins are at around 10 percent.

These are handsome performance outcomes. Aggregate net profits have reached Rs.2.92 trillion. All listed companies about 4,800 of them had generated Rs.2.35 trillion a year ago, in December 2022. In the following three quarters, the full sample of listed companies had generated an average of about Rs.3 trillion per quarter. It is clear that the Rs.3 trillion of net profit in a quarter would be consolidated further in the December 2023 quarter.

Net profits of listed Indian companies have thus likely reached about 4.5 percent of GDP and 6.7 percent of non-agricultural non-public administration GDP. These ratios have seen a dramatic improvement after a steady fall earlier. Net profit as a percent of non-agricultural non-public administration GDP fell from 9 percent in 2007-08 to 1.7 percent in 2019-20. At an estimated 6.7 percent, it is in 2023-24 where it was in 2011-12 before its prolonged fall.

Total income growth and net sales growth have improved compared to the preceding two quarters. In the June and September 2023 quarters, total income had grown year-on-year (y-o-y) by 4-4.5 percent. In the December 2023 quarter it grew by 7 percent. While this is a small improvement it is still underwhelming. It is lower than the 16.2 percent increase seen in the year ago quarter, i.e. in the December 2022 quarter. It is lower than the long term median yoy growth of 12 percent and is at the lower end of the long-term inter-quartile growth range of 3-20 percent. More importantly, it is lower than the 9.3 percent estimated nominal growth in the December 2023 quarter.

The sustained tepid growth in the top line possibly reflects a combination of lack of swollen commodity prices that inflated sales earlier and poor consumption demand growth in India. But, in spite of the lack of strong top line growth, companies have reported handsome increase in profits. While sales grew by only about 7 percent, net profits are up 27 percent.

Growth in net profits is a volatile metric. Compared to the 27 percent growth in the December 2023 quarter, net profits grew by 37 percent in June and 39 percent in September 2023. But, they grew by a mere 3 percent and 6 percent in December 2022 and March 2023 quarters, respectively. The high 27 percent profits growth of December 2023 is partly because of the low 3 percent growth in the year-ago quarter. Similarly, the 39 percent growth in the September 2023 quarter reflects partly the 8 percent fall in the September 2022 quarter.

A better and less volatile metric is the profit margin. This shows India’s listed corporate sector’s superlative performance in the December 2023 quarter. Net profits as a percent total income of the 2,823 companies was 10.3 percent. This, we believe is fairly representative of the profit margin of the overall corporate sector because the sample represents nearly 90 percent of the total sales. This 10.3 percent PAT margin is the highest recorded by listed companies since the quarter of September 2010. It is the best in over 13 years.

Interestingly, net profit margins of listed finance companies have been declining gently since their peak in December 2022. And, net profit margins of listed non-finance companies in December 2023 are distinctly lower than their level in 2021. But, the combined corporate sector saw its highest net profit margin since a long time in the quarter that ended in December 2023.

Net profit margins of both finance and non-finance companies have attained high levels and they have consolidated these high levels. But, margins are not on a rising trend. In the case of finance companies they are gently declining and in the non-finance companies they seem vulnerable at their elevated levels. Both face challenges in growing their total income. Thus, while listed companies have once again delivered superlative profits growth, there could be limitations to further growth.

Author is MD and CEO of Centre for Monitoring Indian Economy Pvt. Ltd.

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