Remarkable resilience

Third quarter results weather note ban

Corporate results from the “demonetisation quarter” (October-December 2016-17) have delivered a positive surprise. A turnaround in the global commodity cycle, strong agricultural performance and low interest rates helped India Inc overcome some of the impact of demonetisation. The third quarter of 2015-16 was also weak, which created a favourable base effect as well. The results of 1,660 listed companies that have declared results so far show that net profits grew at 27.7 per cent, year on year (YoY), which was the fastest pace in over two years. Revenues, including other income, were up 9 per cent, also the best in two years. However, there are points of concern.

One big contribution came from the metals sector, which benefited from an uptick in the global cycle and from protection. Energy prices also remained in a sweet spot, with both producers and refiners delivering high profits. Sugar and other agricultural commodities saw an upsurge. Banks delivered high profits, based on treasury gains and lower provisioning. On the flip side, the three perennials – information technology (IT), pharmaceuticals and fast-moving consumer goods (FMCG) – had anaemic performances. While IT and pharma were hit by American protectionism, cyclical slowdowns and regulatory concerns, FMCG suffered due to low domestic consumption. Construction and real estate also suffered with losses across these two related sectors. Automobiles and auto-ancillaries had spotty results.

Some of the out-performing sectors may not be able to sustain these results. Sugar is seasonal and cannot contribute again until the second half of 2017-18. Agro-chemicals and pesticides, which were up 15 per cent in terms of sales and 52 per cent in net profits, will also not contribute much until the second half of 2017. Most critically, the balance sheets of public sector banks (PSBs) remain under pressure. Banks enjoyed windfall profits during November-December as swelling deposits led to a crash in treasury yields, which have since moved up because the Reserve Bank of India did not cut rates in its last two policy reviews. Moreover, PSBs reduced bad-loan provisioning during the quarter. In many cases, the non-performing asset and the stressed asset ratios have worsened, even as PSBs reported higher profits.

In energy, PSU marketers delivered excellent profit gains as did the crude oil and gas producers. The sector enjoyed a low-base effect, which wears off in the fourth quarter. Metals pulled out of a massive hole, especially the steel sector, which drastically reduced its losses. But again, given problems in Europe, Tata Steel will find it hard to improve profitability and SAIL is still suffering big losses. Automobiles were boosted by a great performance from Maruti, and good returns from tractor majors, but two-wheeler majors and commercial vehicle manufacturer saw profit reduction. This may be a reflection of easing of discretionary spending. Construction and real estate remained in the doldrums. In the capital goods segment, BHEL saw a turnaround which augurs well, but power generation saw a downturn.

The overall results certainly indicate a heartening degree of economic resilience. However, there were some visible negative impacts from demonetisation and there may have been an “advance consumption” effect, with people using up old notes. A fast recovery from notebandi will be required if these cyclical gains are to be transformed into a more sustainable pattern of long-term growth. At the same time, the rising mountain of NPAs must be tackled.