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Here is what we are seeing happening in major sectors of the economy
(Note: The securities are quoted as an example and not as a recommendation)
Technology Sector:
In the IT sector, Q3FY24 witnessed a continuation of the expected trend of muted revenue growth, largely in line with market predictions. This soft performance can be attributed to various factors, including weak macroeconomic conditions, furloughs (temporary layoff without pay for a specified duration), heightened scrutiny of deals, and delays in decision-making processes.
Despite some signs of recovery in specific segments, the overall performance remained subdued. Larger companies faced challenges in realizing their revenue targets, while smaller players demonstrated more resilience with net additions to their workforce. Consequently, margins for larger firms expanded while those for smaller ones remained largely stable.Additionally, clients became cautious amid tough economic conditions, leading to a notable decline in the total contract value of deals won during the quarter. Client spending on transformation and discretionary projects also experienced a reduction, further contributing to the overall slowdown in USD revenue growth. Looking ahead, there is optimism regarding an improved deal pipeline, which is expected to bolster revenue growth in FY25.TCS and HCL Technology in the sector remained a few outliers, where they witnessed a healthy pipeline of deals and strong bookings despite the cautious spending environment.Pharma Sector:
In the pharmaceutical sector, this quarter showcased promising trends in profitability, with PAT growth outpacing EBITDA growth, which in turn exceeded Revenue Growth. This positive performance can be attributed to various factors, including increased niche launches, improved traction in existing products, and reduced price erosion in the base portfolio, particularly evident in the healthy year-on-year growth in US generics for the quarter.
Domestic formulation witnessed impressive double-digit growth, surpassing the growth rates observed in the previous five quarters. This growth was fueled by healthy volume expansion and the introduction of new products into the market.
Aurobindo Pharma, Lupin & Cipla are a few companies with niche launches that are expected to drive growth. Dr. Reddy, too, has 26 product launches planned in their future 2-year roadmap.
Banking Sector:
The banking sector’s performance in Q3FY24 was a mix of positives and challenges, characterized by healthy business growth, controlled provisions, and persistent NIM pressure.
Credit growth remained robust, primarily driven by continued momentum in retail lending, while the corporate sector lagged, being supported by growth in MSMEs.
However, deposit growth remained modest, led by term deposits, with some banks resorting to raising bulk deposits at higher rates, resulting in a QoQ rise in the cost of funds for the sector. This increased cost of funds exerted pressure on Net Interest Income, leading to stagnant or slightly decreased margins for most banks, as mentioned earlier.
On the asset quality front, there were positive developments as asset quality improved across the sector. Continued momentum in recoveries and upgrades led to a sequential decline in NPA ratios, while PCR remained healthy, therefore giving a sigh of relief on muted credit costs.
With the industry’s Credit-Deposit ratio at its peak, competition for deposits is intensifying, contributing to the upward trajectory of CoF, as more and more banks fight for limited deposits. As a result, NIM moderation will continue to persist.
Most banks continue to press the pedal of growth where ICICI Bank and Axis Bank are looking at branch expansion plans. At the same time, Kotak Mahindra Bank is committed to enhancing its digital capabilities.
Auto Sector:
In the auto sector, the trend of volume growth deceleration over a high base was evident across all segments except for two-wheelers (2Ws). However, Tractor volumes declined due to reduced agricultural activity and erratic monsoon patterns.
Total revenue for our Auto OEM witnessed significant growth, primarily fueled by volume expansion and price hikes. Additionally, EBITDA surged at double the rate of revenue growth, driven by moderating commodity inflation, operating leverage, and favorable foreign exchange benefits.
Looking ahead, input costs are expected to remain stable QoQ, with indications from most managements’ suggesting stability in commodity prices. This stability in input costs contributed to an improvement in gross margins, trickling down to EBITDA margins. Overall, while the automotive sector faced challenges of decelerating growth in various segments, particularly impacted by high base effects, but margins remain solid with expansion happening.
Ashok Leyland and Mahindra & Mahindra’s tractor division expect volumes to see moderation until elections as the tendering process across underlying industries slows down.
Export-heavy players like Bajaj Auto, Eicher Motors, and TVS Motors are foreseeing recovery to play out in the coming quarters, but the current situation remains uncertain even though the continuing devaluation of emerging market currencies has eased now.
FMCG Sector:
In the recent quarter, the FMCG sector saw slow sales growth due to increased local competition, delayed rural recovery, and continuous price cuts. Although volume growth slightly improved, revenue growth stayed low because of these price reductions.
Interestingly, there wasn’t a significant divergence in revenue growth among staple categories, unlike what was observed in packaged food and personal care categories earlier. Within the discretionary space, segments such as paints and jewelry performed well, benefiting from the festive season shift.
Despite the challenges, there was an inspiring margin recovery observed. Gross margin expansion persisted strongly, even as many companies and categories implemented price cuts or offered discounts to pass on the benefits of benign raw material prices.
However, the expansion in EBITDA margins trailed behind gross margin expansion, partly due to heightened advertising and promotion spending investments.
Looking ahead, company managements’ expect the rural recovery to progress steadily, with recent price cuts and consumer offers expected to translate into an uptick in volume growth.
The premiumization trend continues to play in favor of players like United Spirits and United Breweries, while urban markets continue to grow faster than rural markets for bigger giants like Hindustan Unilever and ITC.
(The author Sujit Modi is CIO, Share.Market. Views are own)
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