The earnings push

India Inc shows patchy but encouraging recovery

As the second quarter (Q2) earnings season gets over, the results of a sample of 2,776 listed companies indicates a pickup in profitability. While sales have contracted 3 per cent to Rs 23.57 trillion in Q2, compared to Rs 24.35 trillion in the corresponding quarter last year, operating profit (profit before depreciation interest and taxes, or PBDIT) has grown 30.4 per cent, and profits after tax (PAT) a whopping 316.8 per cent. Adjustments are, of course, required to understand the profit jump. For example, this includes the extraordinary losses of Rs 73,966 crore registered by telecom majors Bharti Airtel and Vodafone India a year ago. The results of refiners, which logged extraordinary profits on revaluation of inventory, also need to be excluded from the sample. Banks and non-banking financial companies (NBFCs) registered credit expansion and higher profitability. These results are also volatile.

 
The picture changes after adjustment of the results of telecom service providers, refiners, NBFCs and banks. The remaining sample of 2,457 companies has shown a small contraction of 1 per cent in sales, accompanied by 27.17 per cent rise in PBDIT and 55 per cent rise in PAT. Operating margins have gone up to 19.35 per cent from 15 per cent a year ago. It may be noted Q2 2019-20 was an extremely weak quarter, creating a low base. However, this is still a vast improvement, after a disastrous first quarter. The rural economy has done well, evident from the excellent results of agro-chemicals companies, high tractor sales, strong growth in fertiliser volume, and a decent increase in sales and profits of edible oils, plantation industries and sugar companies. Good rural demand may have also helped drive double-digit growth in fast-moving consumer goods (FMCG) sales and profits. Some core sector companies have turned in good performances — steel production and cement offtake have improved and their sales and profitability have shown a significant increase.

 
The power generation sector has also shown growth in sales and profitability, which is usually a reliable indicator of increased economic activity. There is a puzzle here as the overall sample has shown 12 per cent drop in power costs. Maybe this anomaly of higher profits for generators coupled with lower costs for users will be resolved if the data for state-run (unlisted) discoms, which sell power to end-users, is considered. If consumption is up in steel, cement, and power, it should mean higher activity in user industries. One key exporter, information technology, has delivered 4.1 per cent sales growth, and 12.3 per cent rise in PAT (in constant rupees) and most have given optimistic guidance. The pharmaceuticals industry has shown 8.7 per cent growth in sales and 26.7 per cent growth in PAT. On the flip side, the realty sector, construction, and infrastructure don’t seem to have done well. The automobile industry, one of the most reliable indicators of big ticket consumption, has seen lower sales volumes (and a big inventory build-up), and auto ancillaries have also not done well, with the exception of the tyre industry. The inventory build-up was in anticipation of the festive season in Q3.

 

Overall, the results are patchy but encouraging. Tax payout has risen 31.2 per cent for the entire sample, shoring up government finances and indicating the reported profits are authentic. Apart from good agri-performance, there was surely some fulfilment of deferred demand after lockdown in Q1. A consumption pickup will be required to sustain this improvement.