Strengthening recovery

Corporate sales must rise to maintain the momentum

Corporate results for the third quarter of the current financial year (October-december 2020) show positive signs across many sectors. Profit margins have improved on the back of lower costs and moderate sales growth. Looking ahead, the 2021-22 Budget’s focus on infrastructure development should encourage investment and employment, which, in turn, should help push consumption. Key sectors like metals, construction, automobiles, and banks have seen turnarounds. Elements of the agro-economy such as edible oils, plantation crops (tea and coffee), and sugar have showed strong performance. The core sector has also done well. Many companies have registered lower interest costs. There are also cost-savings on power and fuel, perhaps due to work from home paradigms. Also, there’s a whopping increase in other income, a gain that may not be sustainable.

Year-on-year (Y-O-Y) comparisons with Q3 of 2019-20 (October-december 2019) show low expansion in net sales alongside higher profits. A study of 2,814 listed companies (with a minimum of ~1 crore in net sales) shows a 2.2 per cent rise in sales Y-O-Y at ~25.46 trillion, a 15.25 per cent rise in operating profit, and a 62 per cent rise in profit after tax (PAT). Removing volatile sectors such as banks, refineries, and non-banking financial companies, the remaining 2,495 companies have registered sales growth of 5.86 per cent, and a 7.8 per cent rise in income, with a 47.1 per cent rise in other income. Operating profit is up 26 per cent, PAT has increased 58.5 per cent. Interest costs are down 5.7 per cent for all non-financials, and lower by 29.7 per cent for refineries, thanks to Reliance Industries’ drive to become debt-free. Interest costs, ex-refineries and ex-financials, went down by 2.8 per cent. Employee costs have risen by 6.75 per cent, indicating a welcome workforce expansion.

Among consumption-related sectors, automobiles, along with the value chain, is in recovery, as are fast-moving consumer goods, textiles, and consumer durables. On the export front, pharmaceuticals and the information technology companies continue to deliver a steady performance while textile exports have also picked up. In the core sector, volume offtake and per-tonne realisations for steel, non-ferrous metals, and cement have improved. There are many turnarounds in the steel sector, which was loss-making a year ago. Power generation is also up. Construction data shows a pickup. Logistics activity is up. Telecom equipment delivered a stronger performance, while service provider Bharti Airtel had a turnaround. Low fuel prices have helped refiners, paints, petrochemicals, chemicals, and plastics (all of which use crude oil and natural gas as inputs) to generate better margins. Bank credit growth at 7.5 per cent has not been high, indicating a muted investment cycle. Banks have seen a turnaround to register PAT of ~30,689 crore versus a loss of ~7,038 crore in the same period last year. However, this may be deceptive, since NPAS have been treated with kid-gloves.

Overall, the Q3 results do suggest that the economy is well set to stay on the recovery path. This explains the overweight stances of several large foreign portfolio investors. Despite all the encouraging signs, there are also reasons for caution. Valuations are running very high, with major indices valued at 40 times earnings. Most of the earnings growth has been discounted and further profit margin expansions are unlikely. Sales growth must rise in order to sustain this recovery. A rising global commodity cycle could push up input costs and increase risks for the market.