Weak Sales Weigh on India Inc’s Profits in 2023
The reduced cost rise and a boost in other income have helped India Inc. through a lacklustre results season. The modest topline growth reflects sluggish demand and the inability of businesses to raise prices above a certain threshold.
Operating profit margins (OPM) have only slightly increased despite reduced expenditures. Employee expenses have increased at the slowest rate in at least four quarters, notwithstanding input prices, which are down 13.4% year over year.
Just 2.6% y-o-y topline growth was recorded for a sample of 2,589 businesses (excluding banks and oil marketing organizations), indicating that companies cannot drive up volumes, prices, or both.
Companies have attempted to control costs to safeguard their margins; falling commodity prices have assisted in cost reduction, and the ratio of raw materials to sales has fallen dramatically by 246 basis points year over year. As a result, net earnings are up 7.5% year over year.
The growth in net earnings would be flat if other income, which has increased 25% year over year, were excluded. Contrary to forecasts, the increase in interest rates has roughly followed that of the preceding two quarters. If lenders and oil marketing firms are considered, the profit picture drastically alters, with net profits increasing by a substantial 44% yearly for 3,010 businesses.
However, as the topline has only increased by 7.5% year over year, it is once again the slower rise in costs along with a sharp increase in other revenue that has increased profitability. For this sample, there has been a substantial 634 bps year-over-year decline in the raw material to sales.
Domestic cyclical like BFSI businesses and automotive manufacturers have fueled earnings growth. Analysts have revised their profit expectations for several consumer-focused companies due to rising commodity costs, particularly those for crude oil and weaker demand.
In 2023, India Inc, a term used to represent the Indian corporate sector, faces a significant challenge as weak sales dent profits. The year was expected to recover strongly following the easing of pandemic-related restrictions. Still, several factors have caused sales figures to dwindle, affecting companies’ profits across sectors. This article delves into the underlying causes, sector-wise impact, and potential solutions businesses are looking towards in response to this downturn.
The global and domestic economic conditions have been less than favourable. Rising inflation, high unemployment rates, and reduced consumer spending are contributing to an overall slowdown, which is, in turn, affecting corporate sales.
The global supply chain crisis has not spared India. Rising raw materials and logistics costs have compounded the woes of companies already grappling with weak demand.
Surging fuel prices have led to increased operational costs for companies, thereby reducing margins and overall profitability.
The manufacturing sector, heavily dependent on raw materials and energy supplies, has been hit hard by rising costs. Companies need help maintaining margins due to escalating input prices and stagnant demand.
This sector faces a double whammy of high operational costs and low consumer spending. The reduced disposable income of consumers has led to decreased demand for non-essential goods, thereby impacting the sales of retail and consumer goods companies.
With increased fuel prices and raw material costs, the automobile industry in India is witnessing a slowdown in sales. Consumers hesitate to invest in new vehicles under current economic conditions, causing a significant profit dip for this sector.
While the IT sector has remained resilient, weak global demand and challenges in executing contracts due to remote work conditions are impacting the profits of service companies.
Companies are aggressively looking at ways to reduce their operational costs. This includes renegotiating contracts, optimizing the workforce, and reducing energy consumption.
Companies are exploring new markets and diversifying their product lines to reduce dependence on a single call or sector.
Companies are accelerating their digital transformation efforts in response to the pandemic and changing consumer behaviour. This includes increasing their online presence, optimizing the supply chain through technology, and leveraging data analytics for better decision-making.
Many companies are also looking towards policy support from the government. This includes calls for stimulus packages, tax breaks, and other incentives to boost demand and help companies stay afloat.
2023 has posed a significant challenge to India Inc, with weak sales severely impacting profitability across sectors. While external factors like the global economic slowdown and supply chain disruptions have played a significant role, internal challenges such as rising fuel prices have further strained the companies.
To navigate these turbulent times, companies are aggressively optimizing costs, diversifying their markets and product lines, accelerating digital transformation, and seeking government support. As India Inc navigates this challenging landscape, agility, innovation, and a strong focus on efficiency will be the key for companies to recover and return to sustainable growth.
This period is a test of the resilience and adaptability of India’s corporate sector. It remains to be seen how India Inc will emerge from this situation, but the steps taken now will define the health and vitality of the Indian corporate landscape in the future.
