Corporate profits for the March 2023 (Q4 of FY23) quarter are expected to be modest with the year-on-year (y-o-y) growth in high single digits. Earnings for the Nifty 50 set of companies are estimated to increase by 9 per cent y-o-y and 8 per cent quarter-on-quarter (q-o-q), according to an estimate by Kotak Institutional Equities (KIE). 

With prices of raw materials softening, a range of user companies are expected to post better operating margins than they did in the December 2022 quarter. 

Net profits for a sample of 3,311 companies, banks and financials had risen by just about 5 per cent y-o-y in the December 2022 quarter, even though revenues had increased by a good 17.5 per cent y-o-y since operating margins had contracted by 150 basis points (bps) y-o-y. 

Although consumer demand is understood to have faded somewhat after the festive season, the macroeconomic environment in Q4 of FY23 has been reasonably good. The robust GST collections in FY23 with the March mop-up coming in at Rs 1.6 lakh crore are a sign that India Inc is doing well, even if some of this can be attributed to high inflation. The Purchasing Managers’ Index (PMI) for both manufacturing and services has held up, although the latter has slowed in March. But the recovery is clearly picking up steam going by strong air traffic numbers, hotel occupancies and demand for power. Moreover, credit flows have risen by about 16-17 per cent y-o-y, suggesting that demand from consumers for homes and from businesses for working capital is buoyant. 

Profits of banks, which have registered strong loan growth and will continue to provide much smaller sums for loan losses, will be exceptionally good. Pre-provisioning profits for frontline lenders could jump by more than 22 per cent y-o-y. Sales of automobiles – especially of passenger vehicles – in the home market have been reasonably good in the March quarter, though exports of two-wheelers have been weak. Some of the demand in the commercial vehicles segment has been driven by pre-buying ahead of the transition to BSVI Phase-II. 

On the other hand, earnings of metal producers, whose realisations have been weaker, will drag down the aggregate numbers. With rural demand still subdued. Makers of consumer staples are tipped to report mediocre numbers, much of it driven by price hikes rather than volumes. Results from most manufacturers of consumer durables too are likely to be lacklustre amid muted demand and pricing pressure. KIE expects net profits for the portfolio of companies that it tracks to increase by just 6.5 per cent y-o-y and 17 per cent q-o-q. 

For software services players, apart from the seasonality factor that will play out, business would also have been impacted by a general slowdown in demand, resulting from the uncertain macroeconomic environment. Top customers in the US and Europe are understood to have slowed discretionary spends to rein in costs. 

Capital goods players would have benefitted from the moderation in commodity prices, chunky order books and significantly improved execution. Most of them should report strong revenue growth and expanded gross margins. Although capital expenditure by States has been flat, spending by the Centre and private sector companies has been going up. 

With several headwinds expected in the current financial year (FY24), especially on account of recession-like trends in Western economies, it would not be surprising to see earnings estimate being pruned after the earnings season. At current levels, both benchmark indices are trading at above historical valuations. At 59,832.97, the Sensex is trading at a price/earnings multiple of 20 times estimated FY24 earnings, while at 17,599.2, the Nifty is trading at a P/E multiple of 19.2 times estimated FY24 earnings.