Losing steam

Second wave could derail strong corporate recovery

The Q4 (January-March) 2020-21 results of a sample of 433 listed companies suggest that corporate recovery has gathered steam. Although higher sales revenues and strong growth in profits have been reported, an analysis of the results must start with multiple caveats. In late March 2020, economic activity was truncated by the lockdown, leading to a lower base. The first quarter of 2020-21 was also hit by lockdown, so the base effect will be more pronounced. On the other hand, while Q4 2020-21 saw some restoration of normalcy, the second wave will severely impact economic activity in the ongoing financial year. Extrapolations from these results are, therefore, liable to error. That said, the sample shows impressive sales growth of 18.5 per cent to Rs 10.87 trillion, an increase of 37.4 per cent in EBITDA (earnings before interest, tax, depreciation, and amortisation), or operating profits, to Rs 3.06 trillion, and 112.9 per cent growth in profits after tax (PAT) to Rs 1.24 trillion. Interest costs have fallen by 11.5 per cent, while taxes paid have risen by 33.8 per cent.

The improvement was across diverse sectors. But there’s a red flag in financials. Banks and non-banking financial companies both showed PAT growth but bank credit stagnated. Excluding volatile sectors like refining, finance, and banking, the 370 remaining companies registered 22.4 per cent growth in sales, 73.9 per cent rise in EBITDA, and 131.3 per cent rise in PAT. Consumption picked up in big-ticket items like automobiles, especially in two-wheelers and tractors. The fast-moving consumer goods sector also saw 25.8 per cent sales growth, coupled with 37.28 per cent growth in PAT. There were strong performances from paints and packaging, both associated with consumption. There was a jump in power generation and a sharp rise in logistics and infrastructure activity. Power generation revenues grew at 18.4 per cent while PAT for the sample of six power companies moved from losses to PAT of Rs 821 crore.

The global bull-run in commodities led to better returns for ferrous and non-ferrous metals. A set of 16 iron and steel businesses saw 47.1 per cent expansion in sales and logged Rs 11,843 crore PAT against aggregated losses of Rs 1,140 crore a year ago. Textiles had a good run with 25 companies reporting a 34.8 per cent rise in sales, including export growth. The pharmaceuticals industry had 26 companies reporting 7.5 per cent rise in sales along with 157.9 per cent rise in PAT. Another export-oriented industry, infotech, had single-digit growth. In the agriculture sector, fertilisers and agro-chemicals showed lower growth rates and profits eased for sugar, which is heading into the off-season. Cement, which had a good performance in the prior quarter, saw stagnating profits along with good top line growth. The results from several large public-sector banks are not yet available and the state-run oil marketing companies may have been hit by rising crude oil and gas prices.

The results are encouraging but circumstances have worsened significantly in the past two months and there is a chance this recovery will run into a roadblock. How much momentum will be maintained through Q1, 2021-22, given state-specific lockdowns, a new trend of job losses, and high mortality, remains to be seen. Steel production, for example, will be hit by the diversion of oxygen for medical purposes. Transport-related industries could see a slump. Consumption may be the biggest question-mark because that depends on confidence and Reserve Bank of India surveys indicate this has been taking several hard knocks.