For the full fiscal year FY24, the financial performance of the corporates was affected by a confluence of factors such as escalating geopolitical tensions, commodity price volatility, the higher monetary policy of major central banks, sluggish external demand scenario, and hit to rural demand from weather-related disruptions, the CareEdge Ratings has said in a report.
The sales growth of corporates improved in Q4 FY24, maintaining the trend of the past two quarters. While sales growth saw improvement, an uptick in expenditure led by rising input prices has impacted corporate profitability in the quarter, according to the report.
For the full year, net sales moderated after two years of strong growth due to slowing global growth and lagging domestic consumption demand. However, lower input costs in FY24 have supported the double-digit growth in profitability.
Notably, net sales for non-financial corporates recorded a muted net sales growth of 1.7 per cent year-on-year (YoY) after two years of strong growth. Muted sales growth can be attributed to headwinds both externally as well as domestically. While slower global growth has impacted external demand, private consumption demand within the economy exhibits a tepid trajectory, with the growth rate decelerating from 6.8 per cent in FY23 to 4 per cent in FY24.
This marked the slowest domestic consumption growth in the past two decades, excluding the pandemic year of FY21. However, strong public capex on infrastructure has supported the investment demand, even though we are yet to see a meaningful uptick in private capex, it added.
However, operating profit and profit after tax (PAT) witnessed double-digit growth of 23.4 per cent YoY and 32.6 per cent YoY, respectively in FY24. Strong growth in annual profitability was largely due to a contraction in overall expenditure (-1.4 per cent YoY), which was led by lower cost of service and raw material prices in H1 FY24.
There was some sequential uptick in raw material prices in the second half, led by industrial metal prices. Growth in employee costs for non-financial firms also moderated from 13.7 per cent YoY in FY23 to 10.6 per cent YoY in FY24. Strong profitability has bolstered the operating profit margins of the corporates which increased from 14.7 per cent in FY23 to 17.9 per cent in FY24.
On the financing front, the interest coverage ratio (ICR) rose from 5.9 per cent to 6.4 per cent, indicating the strong financial health of domestic firms. Strong growth in profitability has supported the ICR despite interest rates staying at elevated levels.
Way Forward
The CareEdge Ratings report stated that even though sales of Indian firms have remained muted in FY24, it is expected to improve going ahead. Urban demand has continued to perform well. High-frequency indicators are indicating an early sign of recovery in rural demand.
Prospects of a normal monsoon have brightened the outlook of rural demand as it will support farm output and lower food inflation. However, it will be crucial to monitor the temporal as well as the spatial distribution of the monsoon. External demand is also likely to improve thereby supporting domestic exports," the report mentioned.
The IMF in April has revised up 2024 global growth projections by 10 bps to 3.2 per cent. A simultaneous recovery in both external as well as domestic consumption demand will support sales growth in FY25. However, with the fresh mandate in the 2024 general election, the direction of the broad policy and budgetary allocation will be crucial to observe as the new government presents its budget next month.
While the overall public capex push is expected to be sustained, the new government may look to support the rural economy via additional allocation for welfare schemes and revenue expenditure. A strong recovery in consumption is also imperative for a pickup in private capital expenditure, as per the report.
Even though lower commodity prices have supported corporate profitability in FY24, this is likely to reverse. Recent trends suggest an uptick in input prices, led by industrial metals prices. However, the net impact of higher input prices will be cushioned by the expected fall in financing costs. FPI inflows into the debt market following India’s inclusion in bond indices and expectations of rate cuts by the RBI in the second half are likely to lower overall borrowing costs.
Thus, the overall performance of corporates in the coming quarters will depend upon the unfolding of the global growth scenario and domestic demand conditions. It is also crucial to monitor any external risks associated with geopolitical tensions, commodity price shocks and weather events. "The broad policy direction of the new government will determine sectoral performances going ahead, the report revealed.
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