Telecom to oil firms: Q2 results give no clear sign of broad revival

The economy is on the mend but sustained recovery will take time: that's the picture you get by studying the July-September quarter results of 1,286 listed companies. Devangshu Datta reads the numbers

There are signs of revival in corporate performance during the July-September quarter of the financial year 2020-21 (Q2 FY21). Economic activity was led by rural performance, which was backed by agro-growth. A sample of 1,286 listed companies (with minimum sales of Rs 1 crore) that announced their financial performance for the quarter under review till November 10 shows improvement year-on-year (YoY), compared to the corresponding quarter of 2019.

There are many extraordinary results, but must be adjusted for a valid comparison. Notably, telecom service providers Vodafone Idea and Bharti Airtel reported record losses in 2019-20 (FY20) due to the impact of adjusted gross revenue (AGR). In 2020-21 (FY21), refiners reported extraordinary profits due to revaluation of inventory. Banks enjoyed a moratorium, which may have contributed to optimistically reported results.

This sample reported net sales of Rs 17.75 trillion (1 trillion = 1 lakh-crore) in 2020-21, which was a drop of 3.7 per cent YoY compared to 2019-20 sales of Rs 18.44 trillion. Total income was down 2.05 per cent YoY despite 9 per cent expansion in Other Income. Operating Profits (EBITDA) was up 26.23 per cent at Rs 5.46 trillion, and Profit Before Tax (PBT) up 106.31 per cent. Reported Profit After Tax (PAT) was up 192.35 per cent at Rs 1.48 trillion, with Profits Adjusted for Extraordinary Items up 53.14 per cent.

Now for adjustments. Vodafone and Bharti declared PAT losses of Rs 73,966 crore in Q2FY20 and losses of “only” Rs 7,981 crore in Q2FY21. Crude and gas prices were very low in April-June 2020, and recovered somewhat in the September 2020 quarter. Refiners revalued inventories, boosting combined bottomline / PAT of Rs 21,135 crore from Rs 12,916 crore YoY. This was despite a fall of 15 per cent in PAT for Reliance Industries. Those inventory revaluations could be reversed if there’s a dip in crude prices in the December 2020 quarter.

High-performance sectors

Banking was a high-performance sector. The sample includes 34 listed banks, which saw 10.39 per cent increase in Total Income, with credit expansion of 10.63 per cent and 216.27 per cent increase in PAT. Several banks delivered excellent results, with strong profit expansion for State Bank of India (SBI), ICICI Bank, Bank of Baroda, Bank of India, IDFC Bank, etc.

The PAT expansion, however, may have come on the back of a dip in NPA recognition. The performance by banks should have had a rub-off effect in the Non-Banking Finance (NBFC) sector. Till November 10, a total of 107 NBFCs have reported numbers that are not encouraging. There is 6.5 per cent increase in credit, but reported PAT has dropped 37.33 per cent for all NBFCs. However, brokerages have done well, indicating higher retail trader interest. The takeaways from finance would be that overall credit expansion is healthy, but we need more clarity on NPA recognition and provisioning before we can be confident of a turnaround in the financial sector.

Removing the volatile results of banking/ financial sector and oil from the results, and adjusting for extraordinary losses registered by telecom service providers, the other 1,244 companies registered marginal 0.03 per cent increase in Net Sales, and 1.67 per cent increase in Total Income. There is 7.45 per cent YoY increase in EBITDA. Operating margin is up to 22.64 per cent from 21.43 per cent YoY. Interest costs dipped 3.3 per cent. PAT grew 2.2 per cent and PAT Adjusted for Extraordinary Items grew 4.11 per cent.
 

This is encouraging, coming off a disastrous quarter, albeit it was compared to a weak base. The performance has not been evenly distributed, however. The good news is that the rural economy is doing better. Tractor sales are up. Agro-chemical firms have done well. Edible oils are on an up-cycle.

 

Private consumption seems to have improved, with some consumer confidence now visible. There has been sales and profit expansion in consumer durables and fast moving consumer goods (FMCG) sectors. However, consumer confidence is not strong enough to have moved sales up across the Automobiles sector.

In FMCG, (33 corporates reporting), there’s been 11 per cent expansion in sales, with double-digit expansion in Operating Profit and PAT for many firms. Consumer durables is less impressive with 1.95 per cent sales growth and 7.11 per cent rise in PAT.

Automobiles and auto ancillaries run hand-in-hand. With 54 auto ancillary firms reporting numbers for the quarter under review till November 10, sales are flat with PAT down 1.3 per cent. In automobiles, the overall picture (12 companies) is gloomy, with sales down 0.77 per cent, PAT down 1.49 per cent and EBITDA down 0.6 per cent. Maruti Suzuki, Hero MotoCorp and TVS have grown sales volumes. But the tractor segment has done really well, indicating agro-strength, with Escorts and VST showing triple-digit profit growth. Tyres have also done well, with higher sales and higher PAT.

Mainstream companies

Returning to old economy--crude, gas and coal--there have been profit expansions in petrochemicals, chemicals, fertilisers and associated industries. Lower crude prices reduce input costs. The power sector, including coal, seems to have benefited as a result. Key industrial and infrastructure inputs such as steel and cement have hit rock bottom and rebounded. Both delivered better results after long stagnation. Cement (24 companies) saw marginal sales expansion, with 9.5 per cent rise in PAT and 3.73 per cent rise in EBITDA.

Steel (48 companies) saw 10.6 per cent expansion in sales, and 51.26 per cent expansion in EBITDA and 77.22 per cent rise in PAT. However, Other Income more than doubled for steel, which leaves a question mark about quality of earnings. SAIL and Tata Steel made a turnaround and several others reduced losses considerably. There are huge differences within the industry. The major offtake of cement and steel comes from infrastructure, construction and realty. Those are struggling. The capital goods sector is also yet to see a pickup. This suggests investment is still in the doldrums.

Among “perennial” performers and exporters, the IT software (80 companies) sector delivered expansion and cautiously optimistic projections. Software has seen 4.59 per cent rise in sales (Constant rupee), with 18.37 per cent rise in EBITDA and 13.28 per cent rise in PAT. Another big exporter, Pharmaceuticals has seen growth, with 7.78 per cent gains in topline and 25 per cent rise in PAT for 79 companies.  There are wide variations within both industries.

Overall, the picture is encouraging. But the gains are spotty and there’s no clear indication of a broad-based revival since outperformances have only come in a few sectors. It will be a long haul towards sustained recovery.