Sales growth of companies (excluding those in BFSI sector) was much more somber at 5.2 per cent year-on-year (y-o-y) in Q1 (April-June) FY25, signalling weak domestic demand, according to a Bank of Baroda (BoB) economic research report.
Further, the 3.1 per cent y-o-y decline in profit growth for the aforementioned segment of 2,539 companies can be attributed to the pickup in expenditure growth.
Referring to the Q1FY25 net sales growth, Aditi Gupta, Economist, BoB, said, this marks a significant improvement from a decline of 2.5 per cent in Q1 FY24 and hence to an extent the base effect propped up the number.
“The continued drag on sales growth is alarming as it signals weak domestic demand. Notably, there is a decline in profit growth for this segment which can be attributed to the pickup in expenditure growth. This can be attributed to an unfavorable base due to a correction and subsequent stabilization in global commodity prices,” she said.
Net sales and net profit of companies (ex-Banking, Financial Services and Insurance/BFSI) in Q1FY25 was at ₹22,86,115 crore (₹21,73,939 crore in Q1FY24) and ₹1,90,823 crore (₹1,96,883 crore), respectively. Interest costs for companies remained almost steady in Q1 FY25 at ₹53,105 crore (₹52,189 crore), per the report.
Sectors with the maximum traction in sales included, consumer durables, electricals, power, business services and retailing amongst others. For some of these sectors, seasonal demand was a major factor driving sales.
A majority of the sectors witnessed stress in maintaining growth in profit achieved last year. There were only 15 sectors for which the growth in net profit was higher than last year. These included consumer durables, textiles, chemicals, and healthcare amongst others.
Gupta underscored that among the sectors which did well on both profit and sales metric, consumer durables and retailing shine due to increased demand during severe heatwaves. On the other hand, sectors such as iron and steel and cement witnessed a slowdown amid general elections and slowdown in Government spending
Interest coverage ratio
However, the sharp drop in profitability resulted in a marginal decline in interest coverage ratio (ICR) to 5.76 (5.97) for the ex. BFSI segment. Despite the moderation, the ICR remains at comfortable levels.
ICR is a measure of the debt servicing capability of a company and indicates if it is making enough profits to meet its interest liabilities. It is calculated as a ratio of profit before interest and tax (PBIT) and the interest cost.
Out of a total of 33 sectors, 17 witnessed a moderation in ICR in Q1 FY25 compared with the same period last year.
“This is despite the fact that the weighted average lending rates (WALR) by banks were virtually unchanged in both the periods. Hence the decline in ICR can perhaps be explained by lower profits.
“The main driver of the lower ICR in Q1 FY25 is a moderation in profits, which is worrisome. This is especially true since profit growth is likely to remain muted due to an unfavorable base. This is likely to be offset to some extent by stable input prices, an increase in selling prices and a possible rate cut by the RBI,” opined Gupta.
Amongst the top 10 most heavily indebted sectors — power, crude oil, telecom, iron and steel, auto, non-ferrous metals, logistics, healthcare, chemicals and real estate — six saw an improvement in ICR. This includes telecom, a sector which has been marred by high debt levels due to legacy issues, the report said.
“Despite the improvement, the ICR for the telecom sector remains below 1, which is a cause for concern,” it added.
Sectors such as automobiles and healthcare witnessed a sharp improvement in their respective ICR backed by a robust performance in both sales and profits. On the other hand, sectors such as crude oil and chemicals have been plagued by a decline in profitability, which is affecting their debt serviceability capacity.