India Inc's Q4 net profit takes a 22% hit due to Covid-19, says ICRA

While margins contracted by 30 basis points on y-o-y basis, they fell a sharper 120 basis points on a sequential basis to 16.8 per cent

Financials of Indian companies saw sharp decline in the March quarter — both on sequential and year-on-year (YoY) basis — due to the Covid-19 pandemic.

An ICRA results analysis of 184 companies, excluding financial sector entities, indicates 22 per cent fall YoY in net profit in the March quarter. The March quarter performance also dented 2019-20 (FY20) bottom line, which fell 12 per cent over the year-ago quarter.  

While aggregate revenues were down 2.9 per cent YoY, the impact on margins was higher. While margins contracted 30 basis points (bps) on YoY basis, they fell sharp by 120 bps on sequential basis to 16.8 per cent. Profitability was impacted adversely due to subdued demand, tepid realisations in commodity sectors, and negative operating leverage. Pre-tax profit margins fell to multi-quarter lows of 7.1 per cent. The impact of the lockdown is expected to be even more pronounced in the June quarter.

Commenting on India Inc’s performance, Shamsher Dewan, vice-president-corporate sector ratings, ICRA, said the fourth quarter (Q4) results were significantly impacted by consumer- and commodity-linked sectors.

Despite some uptick in the initial months of the last quarter, major consumer-oriented sectors, such as fast-moving consumer goods, consumer durables, and auto original equipment manufacturers and ancillaries, reported either a decline or marginal growth in sales volumes, weighed down by subdued consumer sentiment and increased wariness.
 

Tepid realisations, driven by softening commodity prices (in line with global trends), coupled with subdued volumes in light of the pandemic outbreak and macroeconomic slowdown, resulted in revenue contraction for major commodity sectors, including oil and gas entities, metals and mining, and iron and steel, said Dewan.
 

The ICRA study indicated the weakening of the interest coverage ratio to 3x in Q4FY20, from 3.5x in the December quarter, and 3.6x in Q4 of 2018-19 due to fall in earnings. Interest costs increased 13 per cent in the year-ago period on account of higher debt levels and IndAS 116 accounting adjustments related to lease rentals.

Sectors such as airline, telecom, and construction saw significant increase in interest costs on YoY basis on account of the same. At the same time, the earnings before interest, tax, depreciation, and amortisation contracted due to negative operating leverage. Interest cover in select stressed sectors, such as power and real estate, slipped below 1x, highlighting serious credit concerns.

The priority for India Inc, according to Dewan, would be managing liquidity, cutting costs, and improving digital infrastructure, wherever possible.

“Pay reduction, employee rationalisation, and re-negotiating vendor agreements like lease rentals have already been effected by many corporates. However, despite these efforts, credit implications of the pandemic will remain significant for many entities,” said Dewan.