After the highs of corporate earnings in the first half of 2022, we ought to be prepared for a more moderate showing in this, the last quarter of India’s fiscal year 2023. The slowing down or moderation in corporate earnings follows from a slowdown in economic activity, and especially due to the positive base effects wearing off. But all is not downbeat on the earnings front, because there are gains to be had from supply shortages easing and actually improving, as well as commodity price inflation cooling down somewhat in the past quarter and more.
It’s a different kind of gain, however, for companies. For almost two years, during the post-pandemic phase of economic recovery, they were forced to raise prices due to supply shortages as well as inflation that was driven by a huge surge in pent-up consumer demand. Higher energy prices also put upward pressure on costs, especially in the form of transportation costs, which still seem to be on the high side in India. If corporate earnings in the latter part of FY21 and all of FY 22 reflected higher prices as higher revenues realized by companies, there were also higher input costs and other expenditure. What many companies did was to cut production, due to supply shortages, and still manage growth on the topline and the bottomline metrics.
Now, that there is a moderation in consumer price inflation (only so slight in the month of March 2023) and in some commodities, and with supply improving, companies will have to recalibrate their pricing strategies and their volumes to once again grow at a sustainable, steady level. Of course, as always, there are variations by industry and company strategy. For example, once again, the CPG industry has been resilient through all the disruption and high commodity inflation. Large companies operating at the mid-to-high-end of the market have managed to generate reasonably good growth, through higher prices. I don’t think there has been much downtrading here in terms of brand choices, though in certain categories there would have been smaller unit sales in terms of smaller pack sizes. While HUL and Nestle have reported good earnings as a result of better pricing power, Dabur reported earnings that were more muted and a tad below estimates.
A good and fairly direct correlation between corporate earnings and cyclical economic growth can usually be seen in core sector industries, such as metals, cement, fertilizer, power, oil and gas, etc as these are leading indicators of economic activity and demand in the system. The demand might not be immediate in terms of consumer demand, but these industries reflect aggregate demand in the economy, as essential inputs into wider industrial activity. Here, if we look at the full year’s numbers, even though core sector growth is reported every month, we find that India’s core sector industries grew 7.6% in FY23 as compared to 10.4% in FY22, which is already a high base. This is not bad, though the growth is mainly on account of coal and fertilisers growing exceptionally well; all other industries report serious moderation, which is indicative of the economic slowdown that we are likely to see this year. However, since the Indian government has announced a huge capex push in infrastructure investment this year, core sector industries’ growth ought to be reasonably good.
They should also do reasonably well if the demand for consumer durables like automobiles and white goods (household appliances) stay firm. From all accounts so far, the Indian automobile industry is seeing somewhat of a revival and what a revival it has been. Driven largely by SUVs and electric cars and two-wheelers, passenger vehicles alone have seen 26.7% growth in FY23 over the previous year at 3.9 million vehicles of factory sales. In terms of retail sales, India saw 3.6 million passenger vehicles being purchased in FY23, growing by 23%, according to FADA (Federation of Automobile Dealers Associations). This despite higher prices and still high fuel costs. FADA expects a considerable slowdown in FY24 due to a combination of factors such as regulatory price increases, inflation, higher interest rates, and a high base. Therefore, automobile companies will have to plan this year’s product pipeline and pricing intelligently in order to eke out growth in an otherwise tough year. For the last quarter of FY23, Tata Motors has reported an excellent set of corporate earnings, helped no doubt by the strong recovery of JLR as well. As has India’s largest passenger vehicle maker, Maruti-Suzuki.
Usually in an economic slowdown, consumption of discretionary goods tends to slow down, while that of staples stay relatively stable. That is one of the reasons why the CPG industry manages to stay resilient during downturns. In India, the most important period for discretionary goods consumption tends to be the festive season, starting in August-September and carrying on till March-April, accompanied by the wedding season as well! One read in media reports that the sales of automobiles, appliances, jewellery and apparel, as well as electronic gadgets went through the roof during the last festive/wedding season in India. That doesn’t mean this year will turn out to be another blockbuster year, but companies ought to plan for achieving growth in a muted year, including by managing expenses well.
A lot also depends on how soon India manages to bring inflation down to reasonable levels. The latest CPI reading for India in April 2023 has come in at a lower 4.7% with core inflation also at a reduced 5.2%, from 5.6% and 5.8% respectively, the previous month. This is the second month of reduced inflation and we need to ensure that we stay on this lower trajectory. The RBI will in all probability pause rate hikes once again at their next policy meeting in June 2023.
Inflation affects consumption demand through higher prices as well as higher interest rates. Plenty also depends on the monsoons this year as it has a significant impact on rural incomes and rural consumption demand. Many companies from those in the CPG industry and automobiles to agricultural goods and financial credit have been depending on rural India and small towns for growth. And finally, of course we have international commodity prices that are hugely impacted by the ongoing conflict in Ukraine as well as the reopening of China. The latter will be an engine of growth for the entire world, as also a source of commodity inflation, depending on how much it accelerates its economic growth.
Speaking of corporate earnings by sector, we must also look at services. The economic recovery in services is much stronger at this time, not merely in India, but across the world. The latest IIP (index of industrial production) for March 2023 has come in at a 5-month low at 1.1 with a much slower 0.5% growth in manufacturing, and -1.6% contraction in electricity. What’s more, consumer durables and non-durables have both contracted by -8.4% and -3.1% respectively which doesn’t augur well for consumer demand. This IIP data doesn’t quite tally with India’s PMI for manufacturing and services, both of which grew in April 2023 to 57.2 and 62, respectively.
It appears that Indian banks have made huge improvements in their asset quality, reducing their bad loans, as also increasing their net interest income. And this is not just the private sector banks, which were performing better anyway, but our public sector banks as well. This should come as good news for all those looking at investing in India.
Credit card spends seem to suggest that the Indian consumer is in good financial health. Credit card spends in India rose by 47% in FY23 to Rs. 14 trillion according to this Economic Times article that cites RBI data. As you’d expect, most of it is on e-commerce transactions. However, given the economic slowdown expected and high inflation and high interest rates, one must also consider the overall level of household debt in India.
The travel and hospitality sector has rebounded strongly in India, as it has around the world. This is certainly a post-pandemic recovery in the industry that was among the worst affected by the coronavirus. The Indian hospitality industry has posted a strong recovery and set of earnings for Q4 FY23. One can’t say the same of the Indian air travel industry, though. It has seen a huge recovery over pre-pandemic levels, with passenger traffic growing at around 60% in FY23. The sector, however, is plagued by woes, even as it consolidated a decade ago, and these are mostly to do with policy issues, I believe. Two of India’s smaller airlines have been badly affected by non-delivery of Pratt & Whitney engines, as well as financial troubles and are going into bankruptcy proceedings.
The infrastructure industry, manufacturing and banking and finance have all fared well in the last quarter of FY23. Although few companies have reported earnings so far, moneycontrol.com’s analysis suggests that some industries are clearly performing better than others. The fabled Indian IT industry has posted muted earnings this year, and is expecting a further slowdown due to the global economic slowdown, though they ought to do better within India. This Economic Times article cites NASSCOM’s report on FY23, saying that growth of the Indian tech industry had slowed last year to 8.4% at US$245 billion, when the previous year it had grown by 15.5% to US$226 billion, thanks to greater digitization and investment in information technology during the pandemic and the recovery period.
Another service sector industry to watch is telecom, as it is the route to realizing greater connectivity, delivery of services, improvement of mobile and digital payments, consumption of internet data and media and entertainment. However, in India, it is anything but. This industry too is plagued with woes arising out of adhoc telecom policy, which has had to be revised time and again, with the Indian Supreme Court having to step in over a decade ago and cancel most mobile licenses, as a result of which most international telecom companies left the country. The industry is down to just three companies, and one of them, Vodafone Idea, now majority owned by the government of India.
I have never worked on the telecom industry in advertising and brand communications, but as an observer and reader of news, I am of the view that the government of India controls the industry which is mostly in the private sector. And by that, I mean controlling the earning capacity of telecom companies through various fees, sundry charges, all of which are tantamount to revenue maximization by the government of India at the expense of the telecom industry’s growth. It has also seen predatory pricing which has been overlooked by the Telecom Regulatory Authority of India (TRAI) and by the Competition Commission of India, to the detriment of the industry’s true growth potential. This cannot continue and there must be a complete policy overhaul soon. Until then, corporate earnings are dominated with Reliance Jio’s superlative performance and Vodafone Idea’s sinking deeper into a debt spiral. Earnings of Bharti Airtel were good too, even excluding the one-time gain, and Vodafone Idea’s earnings are still awaited.
We also must look at the Indian consumer and see what effect inflation has had on consumption, particularly of CPG brands. According to Nielsen, the Indian FMCG industry grew at a much slower 8.9% by value in the third quarter of last year, two percentage points lower than in the second quarter. This was largely driven by a contraction of consumption in the rural market of -3.6%. They also say that there was a further slowdown in the fourth quarter of 2022, when FMCG price growth fell to 7.9% going into single digits for the first time in six quarters.
Kantar also reports a slowdown in consumption of FMCG in India in FY23, but says that from the start of this year, out of home consumption has started to pick up, especially in snacking. With companies’ input costs coming down and with supply improving, the question is will they pass on the benefits through price reductions in order to boost consumption? That depends on whether they are fighting to retain market share or to protect and maintain earnings growth, sacrificing volumes a tad. Because it is clear that with revenue growth reducing, the focus will be on maintaining, if not improving, operating profit margins and at some point, when volumes drop too much, there ought to be a price correction.
India’s FY23 GDP numbers too will be out at the end of this month and all estimates from RBI and NSO to IMF and the World Bank indicate that the growth will be around 6.5%-7%. It is the next year, FY24 that ought to concern us more, as it is expected to be another year of slowdown.
Meanwhile, if the rain-gods are kind and the monsoons remain good, despite El Nĩno, we have some chance of the rural markets perking up and India eking out a reasonably good year.
The featured image at the start of this post is an aerial shot of Mumbai from Pixabay