It is corporate earnings season once again! And while we wait for major corporations the world over to declare their earnings, we are also watching India Inc’s earnings report for the September 2023 quarter, which falls just before the festive season in India. In fact, because Diwali is slightly later than usual this year, we might see the real impact of the festive season in India only in the December quarter. And as it is, we are expecting the second half of our fiscal year to be better than the first.
I am particularly keen to see the corporate earnings of global MNCs, to see how they might have been impacted by the so-called de-risking away from China, or indeed by the economic slowdown there. Also, it would be important to see the impact of the rising dollar on the earnings of American and other western multinational firms. In India, the focus ought to be on our domestic market, as we are indeed fortunate to have a large customer base. Besides, private consumption has been the mainstay of our economy for many years, even if it did suffer due to the Covid-19 pandemic and also due to soaring inflation, thereafter.
I have always maintained that India has so much diversity even among its consuming classes that there are enough consumer segments for brands and companies to target and for them to grow. And as always during a cyclical economic revival, corporate earnings growth would vary by industry and sector. The one industry that is likely to continue to see slowing earnings growth is India’s technology industry, thanks to the global economic slowdown and overseas clients cutting back on their tech spends. India’s large information technology companies such as TCS, Infosys, HCL Tech and Wipro have reported a slower growth in revenues as well as in profits sequentially and have lowered their guidance as well. However, I notice that even with weaker technology spends, some of them have reported big business wins, and have also managed to improve or maintain their operating margins. I think this has been possible due to lower headcount and increasing the proportion of contract workers/freelancers. There is no reason why these tech giants shouldn’t pivot in the meantime to more Indian clients – both companies and government – who might still invest more in technology, if these companies are to maintain earnings momentum.
Surprising to hear of this slowdown at a time when AI is going gangbusters and so much of new investment is going AI’s way, as one can tell from the way global tech giants stock prices are spiking. This is also perhaps a sign to Indian tech companies to start focusing on AI technology solutions – both the fundamental technology as well as its applications. After all, China too has been investing hugely in AI and is a close second to the US in terms of AI capabilities.
We are now witnessing another war, this time in the Middle East. And who knows how long this will aggravate the spike in crude oil prices. Indian oil companies might not increase prices, thanks to the state elections that have just been announced as well as our general elections next year. For the time being, automobile companies in India are safe and they have been reporting steady growth in sales each month of 2023. Domestic sales of passenger vehicles has grown in the September quarter of 2023 to 1,074,189 vehicles from 1,026,309 vehicles in the same period last year, according to SIAM (Society of Indian Automobile Manufacturers), a growth of 4.66%. According to The Economic Times, retail sales too have grown strongly in September 2023 compared to last year, with passenger vehicle registrations rising by 19%. Customer demand ought to be healthy during the festive season, and it’s important to note that the growth is also coming from growing sales of EVs, albeit on a small base. If oil prices continue to stay high, or rise further, it might further accelerate the shift to EVs.
Otherwise, commodity prices have softened considerably and this is largely being attributed to the slowdown in China. However, what I seem to sense is that Indian companies are not yet passing on the cost benefits to consumers in the form of reduced prices. This is true of both CPG and consumer durable companies and brands. They will probably wait till it starts hurting their volumes or aggravates downtrading and then adjust their retail prices. And they will also wait to see how strong consumer demand is across all cities and towns as well as rural India. As I also wrote earlier this year, the earnings of companies that operate in the premium and higher end of the market was better than those that operate in the middle and lower end of the market. I also expect companies and brands operating at the lower end of the market to start passing on the cost benefits and lowering prices soon, as they address much more price-sensitive consumer segments.
According to The Economic Times Intelligence Group, Indian corporate earnings in the September quarter of 2023 will show higher sequential revenue growth of 10.2% and profit growth to be at a 2-year high of 37.8%. This is on account of lower expenses thanks to cooling commodity prices and other related costs, as well as better demand. This corroborates my view that companies have not yet started passing on lower costs to consumers. Nielsen IQ writes that they estimate growing FMCG sales in both urban and rural India in the September quarter, and from their article as well we can see that there is still price growth on an average. There is also a growth in pack sizes being offered by companies, which explains the growth in units.
A few CPG companies have reported their earnings for the September 2023 quarter and it does seem to indicate that consumer demand is picking up, in response to lower inflation. Urban demand seems to be picking up faster than rural consumer demand, though this too might improve based on the effect of the monsoon on rural incomes. Hindustan Unilever has seen a growth of 4% in sales and profits over the previous year, while volume growth is muted, though, at 2-3%. Operating profit margin too has shown an improvement, which corroborates what I have just said about maintaining or improving margins. Nestle and ITC too have reported a good growth in profits, with the former reporting a surge in profits of 37% while both companies saw revenue growth of 10% and 8.9% respectively.
While we still wait for India’s September quarter 2023 GDP to be announced, there is also evidence of higher consumption from India’s retail loans growing. Indeed, the RBI in its latest monetary policy announced in the first week of October 2023, has asked banks and NBFCs to be watchful on personal loans; unsecured personal loans which are credit card outstanding dues have grown as have other personal loans. This too indicates that consumer demand is strong. What might cool the credit market next year is the RBI engaging in additional sale of government bonds in open market operations in order to remove excess liquidity, as The Economic Times reports.
The few private sector banks that have reported earnings so far in India have reported good earnings results. HDFC Bank – after its merger with HDFC – has reported a huge bump up in profits for the quarter, while ICICI Bank as well as Kotak Mahindra Bank and some others have reported good earnings coupled with good lending to both individuals as well as businesses, large and small. It is public sector banks’ earnings that we will have to wait and see, for improvement in reduction of bad loans as well as in earnings.
Hopefully, the extent of the tightening of liquidity by India’s central bank ought not to affect lending to businesses, as that would impact business investment. As it is, business investment of the job-creating kind has slowed after the initial post-pandemic surge. In light of the government doing more of the heavy lifting in capex investment of the infrastructure kind, business investment will have to increase later next year. All the government schemes and sops offered ahead of elections will also tend to be inflationary, as will the increase in agricultural MSPs (minimum support prices) even as unseasonal rain this monsoon would have impacted crops. We will know the full effect of these only later in the year.
Infrastructure growth will probably be good this year, even if mainly on roads, as the Union Budget for the year indicated. This is reflected in the core sector data for each month, showing good growth; the core sector growth for September 2023 was 12.2%. Though, with coal production continuously increasing and the government’s monopoly on it, one wonders about India’s NDC commitments towards meeting the Paris Climate Accord targets. UltraTech Cement has reported a 60% surge in profits for the September 2023 quarter, and a 15% growth in revenue, though sequentially, there was a drop in both revenue and profits due to monsoons and seasonality. The Company sees strong demand from all sectors, which is bound to happen with the capex push on infrastructure.
India’s industrial production too has been growing in recent months, though the IIP is not very reliable data. This figure hardly ever tallies with PMI as I have written before; the PMI data too show strong growth both in manufacturing as well as in services, with manufacturing growth slowing a tad in September 2023, but services still growing at a robust pace.
According to India’s industry body, CII (Confederation of Indian Industry), business confidence in their survey has shown a good uptick and companies are increasingly confident and busy in their activities. New orders and capacity utilization improved vastly. While this is a good sign, I wish their survey would also include employment as a metric. What the country badly needs is a step-up in job creation and in gainful employment. This is sadly not the case, despite business investment having improved. Both large and small and medium businesses need to increase hiring, and of the stable, long-term kind. Temp hiring, gig economy and contract labour is not good enough, even if those are growing. There is no way that consumer demand can be sustained if unemployment remains high and there is high inflation as well.
According to CMIE, unemployment fell in September 2023 to 7.1%, which is not saying very much. And the 30-day moving average as of October 25, 2023 was 10.8%. Besides, there are news reports that work demand under MNREGA increased in the first half of FY24, with the government having spent 93% of its MNREGA allocation of Rs 60,000 crores. The government is expected to take a decision this month on increasing the MNREGA allocation. All this points to an economic recovery that is not on very solid ground in manufacturing, and is likely to be hobbled by high levels of joblessness, especially in rural India.
So, even as consumer price inflation cools, it is not the only factor keeping consumption demand strong. There is the huge unemployment issue which I keep harping about on my blog. It is India’s Achilles heel, and could derail any grandiose dreams we have about becoming a US $5 trillion economy, or the world’s third largest economy, or the next economic superpower, as an article in Brookings/HBR asked recently.
Something is so rotten in the state of Denmark, that even those who talked big about India’s demographic dividend decades ago have gone silent in recent years. India’s vast potential as a market economy depends on people being fully employed in good and well-paying jobs. Time to up the human capital quotient, across industry, big and small. Time to invest more in good quality education and healthcare, as I have also been repeatedly saying. And perhaps it’s time for India’s tech industry to lead the world in AI innovations that are human-friendly and don’t put jobs at risk.
India is bucking the slowdown trend, but only just. Besides, it is not FY24, but FY25 that is now likely to be the slowdown year globally. It’s only a matter of time, and millions of unemployed before the slowdown catches up with India.
The featured image at the start of this post is of the Mumbai skyline shot by Aj777x on Wikimedia Commons CC by SA 4.0
Peripatetic Perch 