An astonishing recovery

The financial year 2020-21 was one of recovery for corporates after the outbreak of the Covid-19 pandemic in the last quarter of FY20 and the subsequent national lockdown brought economic activity to a halt in the April-June 2020 quarter. Listed companies have, however, recovered most of their loss in revenues and profits in the second half of FY21, and this shows up in the numbers. The combined revenues of BS1000 companies were down just 6.1 per cent in FY21 over the previous year, despite a complete washout in the first quarter of the fiscal.

The recovery in earnings was even more astonishing. The combined net profit of BS1000 companies was up 86.1 per cent year-on-year to an all-time high of Rs 4.46 trillion in FY21, 9.3 per cent higher than the pre-Covid high of Rs 4.08 trillion in FY19.

The revival from the Covid-19 shock was, however, very uneven and raises questions about the future trajectory of industrial growth and corporate earnings in the country.

The rise in corporate earnings in FY21 was largely led by a handful of big companies in price-sensitive sectors such as metals and mining, and oil and gas. Top companies from these sectors gained from a sharp rise in commodity prices in the second half of FY21, after a sharp fall in Q4FY20 and Q1FY21. That’s why the median growth in earnings was only 15 per cent in FY21, and nearly a quarter of BS1000 companies reported earnings declines.

A better show by bigger companies resulted in a rise in market concentration, as top companies cornered a bigger chunk of revenues in many industries. This is most acute in the mining and metals space, where the big-five metals producers now account for nearly 75 per cent of ferrous and non-ferrous metal production in India.

Not surprisingly, margins and profits in the metals space reached a record high. Many experts see metals as the new oil, as economies transition from fossil fuels to green energy such as solar, wind and battery-powered transportation. Industrial metals such as steel, aluminium, copper, zinc and nickel are critical inputs, and higher or more volatile prices could slow global progress towards a clean energy future or make it costlier, the IMF says.

Higher commodity and energy prices are the biggest challenge for the Indian economy and the corporate sector. There are fears that a combination of higher inflation and raw material costs could hobble the post-Covid recovery. The other challenge is a sharp rise in benchmark bond yields in the last three months that has begun to push up borrowing costs.