India Inc revenue growth to decline in Q1 of FY25: ICRA

General election, subdued rural demands to hit company earnings.

 New Delhi: Revenue growth of corporate India is likely to decline in the first quarter of the current financial year when compared with the previous quarter due to a pause on infrastructure activities for a major part of the period due to the general election, rating agency ICRA said on Monday.

“While signs of a revival in rural demand have emerged, headwinds such as a slowdown in the Government of India’s spending during the Parliamentary elections and onset of monsoon period are likely to weigh on growth in H1 FY2025,” the rating agency said in a note.

However, the operating profit margin (OPM) is likely to remain steady in the range of 15-18%, despite the expected tapering in revenue growth, as raw material costs are expected to remain steady.

During January-March 2024 quarter revenue of corporate India increased by 5% year-on-year, while the sequential growth stood at 6.3%. The growth was supported by healthy demand in consumer-oriented sectors like airlines, hotels, automotive and FMCG. In addition, the growth in power and construction sectors was strong.

The YoY revenue expansion was curtailed to an extent by a decline in realisation levels amid softening input costs (mainly raw materials), largely for sectors like fertilisers and chemicals, which also faced a demand slowdown due to channel inventory destocking.

“The growth is expected to marginally slow down in Q1 FY2025 (on a QoQ basis), on a relatively high base, amidst a perceived temporary pause in the infrastructural activities for a major part of Q1 FY2025 due to the General Elections and the dependency of rural demand on the monsoon,” said Kinjal Shah, Senior Vice President & Co-Group Head – Corporate Ratings, ICRA.

The first two months of the April-June quarter were impacted by the Model Code of Conduct.

“Moreover, the concerns of the ongoing geopolitical tensions may adversely impact demand sentiments, especially for export-oriented sectors,” Shah added.

ICRA’s analysis of the Q4 FY2024 performance of 558 listed companies (excluding financial sector entities) revealed that the operating profit margin of these companies increased by 92 bps to 17.2% on a year-on-year basis.

This was primarily aided by the softening in commodity prices and benefits of operating leverage. However, on a sequential basis, the OPM remained flat.

Sectors like auto, power, pharmaceuticals and metals and mining reported YoY improvement in OPM on the back of gradual price hikes undertaken and softening of input costs, however, some others like chemicals and fertilisers reported YoY contraction due to weak demand for these sectors. 

While the input costs softened in recent months, they remained higher compared to the historic levels, and accordingly, India Inc.’s OPM is yet to revive to its historic highs (18-19% seen in FY2022), ICRA said.

With the RBI Monetary Policy Committee (MPC) having taken a pause on rate hikes since its April 2023 meeting, India Inc.’s interest coverage is expected to remain largely stable in the near-term.

India Inc reported a marginal increase in debt levels in 2023-24 on a year-on-year basis. The increase in debt level was predominantly in sectors like gems and jewellery, construction, sugar and chemicals (due to increase in working capital requirements). Despite the variations in debt levels across sectors, India Inc. reported largely stable credit metrics over the recent past.

“The credit metrics of India Inc. in Q1 FY2025 are estimated to remain largely stable with the interest coverage ratio in the range of 4.7-5.0 times, against 4.9 times in Q4 FY2024. Evolution of the global economic scenario and the onset and intensity of the monsoons in India, would remain a key monitorable over the near-term,” the rating agency said.