Underlying trends suggest recovery

GOING BYrecent corporate results, economic activity in India is gaining momentum.

As shown in chart 1, net sales of around 3,000 companies analysed by Business Standardgrew by 10.1 per cent in the third quarter of 2017-18, up from the 7.2 per cent in the previous one. Excluding those of oil companies, banks, and other financial firms, net sales rose by 9.1 per cent in Q3FY18, up from the 6.3 per cent in the previous one.

As seen in chart 2, among larger sectors, fastest growth was seen in casting, forging and fasteners, steel, automobile ancillaries, cement, and nonferrous metals. On the other hand, some of the worst-performing sectors in the third quarter were diamonds, gems and jewellery, edible oil, telecom services, consumer durables, and shipping as shown in chart 3.

The firm-level data also shows that the profits of these companies saw an uptick in the quarter ended December 2017. The reported profit after tax grew by 4.1 per cent in Q3FY18, up from a 12.7 per cent contraction in the previous month. But as seen in chart 4, profit growth is better if one excludes oil companies, banks, and financial firms. However, employee costs, as seen in chart 5, have grown by 7.6 per cent in Q3FY18, up from the 6.6 per cent in the previous quarter.

Though some of these firms may have benefited from a low base (demonetisation was announced in Q3FY17), analysts say the underlying trends suggest a recovery in the economy with broad-based volume growth across sectors.

Further, as chart 6 shows, there has been a steady improvement in corporate India’s interest coverage ratio. Calculated by dividing a company’s earnings before interest and taxes by its interest expenses, it measures the ability of a firm to meet its interest obligations. The lower the ratio the more the firm is burdened to service its debt. But as seen in chart 6, the interest coverage ratio rises as well from 0.72 in Q4FY17 to 1.16 in Q3FY18, suggesting an improvement in India Inc’s financial position.