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Margin Improvements Drive India Inc’s Q3 Profits Amidst Revenue Deceleration

India Inc’s third-quarter profit growth remains robust, sustaining a double-digit trajectory, buoyed by stable input costs and reduced interest expenses for manufacturing firms. However, revenue expansion stayed below 10% for the third consecutive quarter.

According to data from the Economic Times, a sample of 3,381 companies experienced an 8.2% year-on-year revenue increase in the quarter, contrasting with a 17.3% surge in the corresponding period of the previous year. Net profit, on the other hand, surged by 25%, benefiting from a lower base of 2.2% growth a year earlier, marking the third successive quarter of double-digit profit growth. This upturn was primarily driven by domestic cyclicals like automobiles and financials, alongside global cyclicals such as metals and oil and gas.

Operating margins saw a slight uptick of 10 basis points year-on-year, reaching 17.3% in the December quarter. However, sequentially, margins contracted by 160 basis points, indicating a gradual erosion of the advantage from favorable input costs amidst single-digit revenue growth.

Following a robust Q3 performance, the cost advantage for India Inc is beginning to fade, necessitating a focus on volume expansion to leverage operational efficiencies.

Excluding banks and finance companies, revenue growth decelerated to 4.4%, reflecting subdued performance among non-lending entities. Conversely, net profit growth surged to 35.3%, attributable to reduced interest expenses. Interest as a percentage of profit before interest and tax (PBIT) decreased to 22.3% from 25.1% in the previous year’s quarter. However, for the entire sample including lending institutions, this ratio increased to 48.8% from 44.9%, indicative of mounting deposit costs impacting interest margins.

The impact of elevated deposit costs was also evident in aggregate operating margins. Operating margin expansion for the subset excluding lenders reached 15%, marking a 190 basis points increase year-on-year, outpacing the 10 basis points improvement in the overall sample. Sequentially, both subsets witnessed a contraction, with the truncated sample experiencing a 150 basis points decrease.

On a sectoral level, performance varied, with companies reliant on discretionary spending reporting lackluster figures.

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