Inflation has a direct impact on the results of listed companies

- Corporate revenue rose 12 per cent but operating and net profits retreated

An examination of the fourth quarter (January-March 2023) results of nearly 500 listed companies shows a drop in profits. However, companies' revenues have increased and consumption is showing early signs of improvement. Costs have increased due to inflation. Higher borrowing costs and rising wage bills are also weighing on margins. The operating income of these companies has increased by 14 percent year-on-year. Operating expenses have also increased by 13 percent, while employee related expenses have increased by 23 percent and interest expenses by 37 percent. Operating profit rose 16 percent but net profit remained more or less flat at 0.7 percent due to higher borrowing costs.

If volatile sectors such as refineries, banks and non-banking financial companies are excluded from this, the results look worse. In that case, revenue is up 12 percent but operating profit is down 4 percent while net profit is down 11 percent. In addition, interest expenses increase by 39 percent. In a way, it is a generalization of the economic situation. In the last financial year, corporate profits rose to 4.3 percent of GDP, the highest in a decade in terms of the ratio.

This is due to a combination of low inflation, tax cuts and spending cuts. The interest-inflation cycle clearly reversed in FY2023. The central bank started raising rates in May 2022 and companies have no room to cut. Despite the rise in rates, banks' performance in the fourth quarter remained strong. In a sample of 25 listed banks, credit expansion increased by 32 percent and fee-based income by 24 percent. However, interest expenses have also increased by 36 percent. Meanwhile the credit-deposit ratio tightened and banks started paying more for funding.

The segment's adjusted net profit increased by 32 percent. Net profit of non-banking financial companies increased by 35 percent. A higher cost of credit indicates that deposit rates have increased. This means that financial conditions will tighten as banks always raise their deposit rates in small increments. In the consumption sector, daily use vehicles and consumer goods are considered. Net sales of fast-moving consumer goods rose 22 percent. Earnings before interest, taxes, depreciation and amortization rose 35 percent and net profit rose 36 percent, while interest expense rose 39 percent.

In the automotive segment, net sales increased by 18 percent and interest, tax, depreciation and amortization by 31 percent. At the same time, net profit increased by 29 percent. Both sales and profits of major two-wheeler manufacturers have increased. This indicates a recovery in consumption.

Results from the information technology sector were also in line with corporate consultants, who offered forecasts that ranged from cautious to pessimistic. A slowdown in global growth has also affected growth and margins here. Most of the leading companies in the information technology sector have reported lackluster results.

At constant dollar value, revenue rose 17 percent and net profit rose 7 percent. Most of the public sector undertakings and many leading companies in the pharmaceutical sector are yet to declare their results. While consumer sentiment seems to be improving, the twin burden of inflation and higher interest costs is starting to weigh on profits.