Number Theory: How did corporate India perform in the June quarter?
India’s GDP grew at 20.1% in the quarter ending June, according to the first estimates issued by the National Statistical Office (NSO) on August 31. This is 1.3 percentage points less than the RBI estimate of 21.4%. Given the fact that India’s GDP contracted by 24.4% in the quarter ending June 2020, this also means that output is still not back to pre-pandemic levels. To be sure, any such conclusion must be seen in the context of economic disruption caused by the second wave of the Covid-19 pandemic, which, in terms of the seven-day average of daily new cases, peaked on May 9, 2021.
In addition to the GDP numbers, another question is worth asking. How did the second wave of Covid-19 affect corporate India? Quarterly results for 2,546 companies, which are now available in the Centre for Monitoring Indian Economy’s (CMIE) Prowess database, can be used to answer this question. Here are the main takeaways from the June quarter corporate results.
Sequential contraction in sales and a base-effect driven annual growth
A normal year-on-year comparison in inflation-adjusted sales of companies shows a healthy 36.6% growth. However, this needs to be read with the 34% contraction in sales in the quarter ending June 2020, which was a result of the 68-day long national lockdown imposed on March 25, 2020.
In absolute terms, inflation-adjusted sales in the June quarter were lower than June 2019 levels. To be sure, the June quarter’s performance was affected by the second wave of Covid-19 infections and therefore a better question to ask is what impact did the second wave had on the ongoing sequential economic recovery. After having fallen by 27% in quarter-on-quarter terms in the June 2020 quarter, corporate sales increased in the three subsequent quarters of 2020-21. This trend was disrupted in the June quarter with a quarter-on-quarter fall of 9%.
Cost cutting led to higher than pre-pandemic profits
Even though sale did not cross the June quarter 2019 levels in the quarter ending June , net profits of these 2546 firms were higher than those in pre-pandemic levels. Part of the reason for this could be the fact that the government announced a cut in corporate tax rates in September 2019, which gave an exogenous boost to profits. However, an HT analysis of the Prowess database shows that cost cutting by firms has also played an important role in boosting profits. The numbers speak for themselves.
While income (sales) of selected firms contracted by 9.5% between the June quarter of 2019 and this June quarter, costs contracted by 9.3% during this period. This played an important role in net profits increasing by 26%. Cost data is available only for 2536 companies. A simple year-on-year comparison of costs will be misleading because of the lockdown last year.
Will rising inflation put pressure on costs going forward? Experts do not think so. Madan Sabnavis, chief economist at Care ratings said that there were no signs of absorption of raw material cost by the firms as prices across different industries have gone up with the rise in input costs. “It looks like with pent up demand surfacing, consumers will pay higher prices and companies can pass on higher raw material costs”, he added.
Smaller firms continue to suffer more
Which category has borne the maximum brunt during the current pandemic? An analysis by size, based on total sales helps understand this. Sales by firm are divided into five categories: less than Rs10 crore; Rs10-25 crores; ₹25-100 cores: Rs100-500 crores; and above ₹500 cores. While the total inflation-adjusted-sales in the June quarter fell for all segments compared to the June quarter of 2019, the biggest fall was seen in small firms with sales less than ₹10 crores. Total sales by small firms contracted by 70% from that in the June quarter of 2019 thereby indicating the higher pressure they are facing.
Non-financial sector suffers more even as expenses fall across firms
Which sectors have performed well from their pre-Covid period? An analysis by sectors shows that out of the three major ones, non-financial, financial and diversified, only companies involved in diversified businesses have shown growth in total sales by 10% compared to the June quarter of 2019. Within the non-financial sector, firms belonging to construction and real estate saw the biggest contraction in total sales by 25% in the June quarter compared to 2019, while others in businesses such as manufacturing, mining and services saw a double-digit decline in their total sales. Total inflation adjusted profits have also grown only for firms in the diversified and financial sectors in June from the corresponding quarter of 2019 while non-financial sector firms saw contraction by 18%. Expenses across all sectors and sub-sectors in the June quarter have fallen compared to 2019 with the smallest fall seen in financial sector firms.
Total inflation adjusted profits have also grown only for firms in the diversified and financial sectors in June from the corresponding quarter of 2019 while non-financial sector firms saw contraction by 18%. Expenses across all sectors and sub-sectors in the June quarter have fallen compared to 2019 with the smallest fall seen in financial sector firms.