Double-digit resilience: Despite high-base effect, India Inc’s FY24 revenue is on a good footing

This will be driven by a 10-12% growth in revenue for the non-commodity sectors, even as commodity prices remain benign.

Importantly, this will be on the back of a 16-18% on-year rise in revenues in fiscal 2023 after the commodity supercycle boost in fiscal 2022.

The revenue increase in fiscal 2023 has been led by an estimated 18-20% on-year increase in non-commodity segments with commodities recording anemic growth of 5-7%, coming off a high base of the previous fiscal.

Trend and projection of corporate revenue growth in India

To analyse the impact of commodity cycles on revenues, the 748 companies have been split into commodity and non-commodity sectors. The share of commodities in overall revenue reached a decadal high of 21% in fiscal 2022 on account of the commodity super cycle compared with ~17% on average between fiscals 2018 to 2021. The share seems to be reverting to the pre-Covid average in fiscal 2024 with cooling of the commodity cycle.Easing commodity prices have meant share of commodities is back near pre-pandemic levels

Value and volume contribution to growth in key sectors

CRISIL MI&A Research has looked at how 10 key sectors have performed over fiscals 2021 and 2022 and are likely to perform over fiscals 2023 and 2024 by analysing the contribution of volumes and value to growth over each of the fiscals. The findings suggest a shift is underway.

In fiscal 2021, 9 out of 10 sectors were driven by value growth, with value accounting for 94% of the incremental revenue, amid the pandemic-induced lockdown crimping volumes across sectors and the commodity upcycle pushing up prices.

The domination of value-led growth continued in fiscal 2022 as well, with eight of the 10 sectors driven by value, accounting for 74% of the incremental revenue. In fiscal 2023, however, cooling of the commodity cycle, coupled with pent-up demand, has led to a switch in fortunes, with 6 of the 10 sectors driven by volume expansion than value. Indeed, value has accounted for only ~35% of the incremental revenue.

In fiscal 2024, volume growth is projected to drive 7 of the 10 sectors, with value accounting for 11% and volume growth the rest. Indeed, barring two-wheelers, all 10 of these sectors would be at or above pre-Covid volumes.

Margin to recover 120-170 bps in fiscal 2024 from near-decadal low

Operating — or earnings before interest, tax, depreciation and amortisation (Ebitda) — margin of the sample set of 748 listed companies is expected to improve 120-170 basis points in fiscal 2024 aided by three factors — benign commodity prices, the full effect of price hikes taken in fiscal 2023 playing out, and volume-driven expansion projected in fiscal 2024.

Operating margin hit an all-time high of 20.7% in fiscal 2021, boosted by a drop in the cost of goods sold on account of lower commodity costs. Indeed, raw material costs declined to decadal lows.

Power and fuel costs, selling expenses, and other expenses also declined on account of a fall in crude prices, slashed marketing spends, and cost optimisation efforts employed by companies during the pandemic.

However, the commodity super cycle that ensued thereafter lifted the absolute Ebitda share of commodity players in our sample set to a decadal high of 27% last fiscal. Margins of these players anyway move in line with the commodity cycle and tend to be volatile.

At the other end, for non-commodity players, whose margins are largely rangebound, higher commodity prices led to a decline in margins in fiscal 2022. However, with commodity prices declining, the margins of both these segments are expected to settle at pre-Covid levels by fiscal 2024.

In fiscal 2023, out of the 180-220 bps decline expected in margins, the commodity segment would account for 80% of margin decline on account of the cooling commodity cycle. Margins are set to decline across the board as the cost of goods sold (COGS) rises to decadal highs in line with the delayed impact of commodity price hikes and delayed pass through of prices to end users. Margins of consumer discretionary services should improve slightly on account of a volume expansion-led improvement in revenue owing to pent-up demand.

Ebitda margin to improve across sectors in fiscal 2024

In fiscal 2024, margin expansion is projected to be broad-based, with margin improvements across all sectors, as cooling commodity prices push COGS lower and revenue across the board is led by volume-driven expansion.

Better profitability helped large corporates improve their financial risk profile

About one-third of companies recorded a reduction in net debt/Ebitda last fiscal. While the overall debt reduced only 7% from fiscal 2020 peaks, net debt/Ebitda reduced due to improving profitability as Ebitda jumped 36% over the period.

(The author, Pushan Sharma is the Director – Research, CRISIL Market Intelligence and Analytics. The article is a part of India Outlook Report 2023 Series)