INDIA INC MIRRORS GDP CONTRACTION IN JUNE QUARTER

Combined revenues of 2,170 listed firms dip 24.3% YOY

It’s not often that the macroeconomy and microeconomy move together. In the April-june quarter (Q1), however, the India Inc numbers have perfectly mirrored the country’s macroeconomic headline. The combined revenues of 2,170 listed firms were down 24.3 per cent year-on-year during Q1, mirroring the 23.9 per cent contraction in India’s GDP for the same period.

It’s not often that the macroeconomy and microeconomy move together and mirror each other. Mostly the latter reacts with some lag. In the April-june quarter (Q1), however, India Inc numbers have perfectly mirrored the country’s macroeconomic headline.

The combined revenues of 2,170 listed firms was down 24.3 per cent year-on-year during Q1, mirroring 23.9 per cent contraction in India’s gross domestic product (GDP) for the same period. At current prices, GDP was down 20.6 per cent, doing better than India Inc.

In contrast, India Inc underperformed the growth in headline GDP by a significant margin. Combined corporate revenues were up just 1 per cent in FY20 against 3.9 per cent YOY growth in GDP at constant prices, and 7 per cent expansion in national output at current prices.

The contraction in the manufacturing and service sector was far worse. Combined net sales of 1,821 firms, excluding banks, non-bank lenders, and oil & gas companies, was down 27.44 per cent YOY in Q1.

“The close correspondence between headline GDP and corporate performance highlights the severity of the economic impact of the lockdown,” said Madan Sabnavis, chief economist CARE Ratings.

The decline in corporate earnings were, however, lower than expected, thanks to savage cost cutting and higher contribution from non-core income such as treasury profits. The combined profit before tax for the entire sample of 2,170 companies was down 55 per cent YOY in Q1, better than 79 per cent YOY decline in PBT in Q4 FY20.

Excluding the troubled telecom sector, the profit before tax (PBT) was down 39 per cent YOY in Q1 against 67 per cent contraction in PBT during the previous quarter.

Firms other than banks, NBFCS and oil & gas, however, witnessed a much sharper fall in earnings. Their combined PBT was down 90 per cent YOY in Q1 against 34 per cent YOY decline in Q4 FY20, and 7 per cent YOY decline in Q1 FY20.

In all, 47 of 57 industries reported revenue contraction in Q1, while 10 reported revenue growth.

Airlines, hotels & restaurants, and retailers were the worst hit. They saw 80 per cent or more contraction in revenues in Q1. Other industries with 50 per cent or more decline in net sales include auto, auto ancillaries, real estate, media textile & garments, petrochemicals, and paper. In contrast, sugar makers, banks, stock brokerages, shipping companies, and telecom operators reported double-digit growth.

Companies in traditional defensive sector such as fast-moving consumer goods (FMCG), pharma, and IT exporters also performed much better, and most leading firms exceeded market expectations on top-line and bottom-line growth. Combined net sales of FMCG, pharma firms, and IT exporters such as TCS, Infosys and Wipro was down just 1 per cent YOY in Q1 against 4.3 per cent YOY growth in Q4 FY20 and 10.6 per cent YOY growth in Q1 FY20.

These companies' combined PBT was down just 5.3 per cent YOY in Q1 against 3.6 per cent YOY decline in Q4 FY20 and 21.3 per cent YOY growth in Q1 FY20.

Analysts expect this trend to continue in Q2 and Q3.

“The essential or defensive sectors are expected to continue to do well. Those where purchases are lumpy such as capital goods, consumer durables and real estate will continue to underperform due to the income shock from the lockdown,” said G Chokkalingam, founder & MD, Equinomics Research & Advisory Services.

Automakers have witnessed strong demand as consumer bought more cars and two-wheelers for commute due to the shutdown of public transport. “The demand is, however, largely at the low-end of the market and it will peter out by the end of September,” said Chokkalingam.

Samir Malik, associate partner at Grant Thornton Bharat, said: “Decline in revenues due to lockdown coupled with fixed costs that couldn’t be absorbed into inventory caused a double dip in India Inc’s profits in Q1. Impairment, expected credit losses and going concern have been the top agenda items for CFOS.” Some others are more optimistic. “The worst is behind India Inc and earnings will continue to improve despite the continuous rise in Covid-19 cases and localised lockdowns,” said Dhananjay Sinha, head research Institutional Equities at Systematix Group.