What do corporate results tell us about the nature of the economic recovery?

India’s GDP grew at 8.4% in the quarter ending September, indicating a return to pre-pandemic levels.

India’s GDP grew at 8.4% in the quarter ending September, indicating a return to pre-pandemic levels. Headline GDP numbers, however, tell us little about the nature of economic growth. An HT analysis of latest quarterly results (30 September) from the Centre for Monitoring Indian Economy’s (CMIE) Prowess database sheds more light on this question. There are 2403 companies in the Prowess database for which September quarter results are available along with quarterly results for last five years. Here are five things which stand out.

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There is almost a V-shaped recovery in sales growth

After having fallen in the June quarter, perhaps because of the second wave of Covid-19, inflation adjusted sales have risen again in the September quarter. A slightly longer-term view of the revenue trend suggests that corporate India has experienced a V-shaped recovery. To be sure, this trend might change when results for a larger sample of companies are available. There were 4783 companies for which annual results are available for five years ending 2020-21.

But this recovery is driven by large firms

Not all companies have had the good fortune of a V-shaped recovery. This can be seen clearly if one classifies companies by revenue-size. A distribution by volumne of sales shows that companies with quarterly sales below ₹100 crore have actually seen a fall in their September revenues when compared to September 2020. The shortfall is even greater when a comparison with September 2019 is made. In fact, the data shows that the fall in sales of smaller companies started even before the pandemic.

There’s also a divergence between recovery in profits and wages

The faster recovery of big companies over their smaller peers is not the only unequal feature of ongoing recovery in corporate India. Even more stark is the divergence between trajectories of profits and salaries. For the 2403 companies analysed, inflation-adjusted salaries have increased by just 4% between September 2019 and September 2021. This number is 300% for profits after tax. To be sure, an important reason for this exceptionally high growth in profit after taxes is the sharp reduction in corporate tax rates in September 2019, when the government slashed tax rates for domestic manufacturers from 30% to 22%, while for new manufacturing companies; the rate was reduced from 25% to 15% provided they do not claim any exemptions. The growth in profits before taxes for this set of companies between September 2019 and September 2021 is 158%.

And a fall in wage costs for most firms even as profits improved

Which category of firms and workers borne the maximum brunt due to the Covid-19 pandemic? Am analysis by size of total sales in the September quarter can help answer this.

Workers working in the biggest companies (quarterly sales above ₹500 crore) were the only ones that saw their inflation adjusted salaries rise above pre-pandemic (September 2019) levels. On a year-on-year basis real salaries improved from September 2020 levels for companies with sales above ₹25 crore. The worst affected workers were employed in the smallest companies, data shows.

The relation between profit growth and company size, however, is not as linear as the wage-sales relationship. When read with the fact that sales growth for smaller companies has not been as strong as the larger ones, this suggests cost-cutting to boost profits.

Input costs rise as businesses reopen

With the reopening of major economies in the second quarter, prices for most commodities used as raw materials have risen in global markets due to an increase in demand even as supply chains struggled. The effect of this is also visible in the latest quarterly results. Out of 1369 manufacturing firms, raw material cost data is available for 1295 for the last five years. While inflation adjusted raw material expenses for these firms were showing negative growth over the two-year period till June, this has now risen by 13% in the September quarter compared to 2019.