When the going will get robust, the robust will get going. This maxim appears to use to India Inc, which appears to have eked out surprisingly good earnings numbers within the July-September 2020 outcomes season.
An evaluation of three,827 listed corporations which have reported their numbers (excluding banks and financials) reveals a robust sequential enchancment within the top-line (up 37 per cent) and internet earnings (up 470 per cent), because of corporations slowly resuming operations put up the lockdown.
On a year-on-year foundation, the top-line fell by 6.7 per cent, indicating that demand is but to succeed in pre-Covid ranges.
Internet revenue noticed an enchancment of 31 per cent year-on-year.
What had been the tendencies underlying this revival? Right here’s a deeper dive into India Inc’s outcomes scorecard.
Demand but to recuperate absolutely
India Inc had been grappling with weak demand owing to financial slowdown even earlier than Covid made its look and the nationwide lockdowns had been imposed. After witnessing muted progress for a lot of quarters, mixture revenues of listed corporations (excluding banks and finance corporations) contracted within the September 2019 quarter by 2.9 per cent. (All numbers talked about on this article are year-on-year figures until in any other case acknowledged.)
However the business-disrupting lockdowns within the March and June 2020 quarters additional worsened the contraction, with revenues of those corporations slumping by 6.Eight per cent and 34 per cent, respectively.
With most consumer-facing companies resuming operations in July-August 2020, the top-line of listed corporations noticed a sequential enchancment of 37 per cent within the September quarter. However when put next with the corresponding quarter final yr, the combination revenues had been nonetheless decrease by 6.7 per cent. If one remembers that the September 2019 quarter was in itself a muted one, this implies that mixture demand is but to recuperate to pre-Covid ranges. Take, for example, Ashok Leyland — the heavy car producer’s gross sales greater than doubled sequentially within the September quarter, owing to pent-up demand in the course of the lockdown. Nonetheless, the corporate’s internet gross sales at ₹ three,835 crore in the course of the quarter had been down 24 per cent over the corresponding quarter final yr — which was already a weak interval with revenues down over 40 per cent.
Different car producers equivalent to Tata Motors, Eicher Motors and Bajaj Auto, too, noticed sequential surge in gross sales, however their revenues are nonetheless under than that in final yr’s September quarter. Major gross sales of car producers to sellers have seen a gradual month-on-month enchancment in October as effectively, and whether or not this interprets into equally robust retail gross sales within the ultimate quarter of the yr stays to be seen.
Equally, corporations within the hospitality and aviation industries, which noticed a whole washout on revenues within the June 2020 quarter, posted wholesome sequential progress within the September 2020 quarter. The revenues of Interglobe Aviation, for example, tripled sequentially.
However when put next with the September quarter final yr, the corporate’s revenues had been down 66 per cent to ₹2,741 crore. For these sectors, the easing of presidency restrictions on occupancy and capability could maintain the important thing to a extra sturdy revival.
Value cuts increase margins
Whereas income progress was no nice shakes, a standout function of India Inc’s outcomes for the quarter was the numerous price financial savings, which noticed manufacturing corporations ship a a notable spike of their working margins.
Of the three,827 corporations that reported their September quarter numbers, 2,537 had been manufacturing-based.
The working margins of those fiirms ncreased to 19 per cent within the September 2020 quarter, in contrast with 16 per cent in June 2020.
Not solely had been direct prices decrease on account of weak manufacturing volumes, however the uncooked materials prices additionally dropped as a share of gross sales to 54 per cent within the September 2020 quarter (from 57 per cent in September 2019). Importantly, these working revenue margins had been additionally a lot larger than these within the September quarter of 2019 at 15 per cent.
The CRB Commodity Index (by Thomson Reuters) — an indicator of core commodity costs — dropped over 15 per cent within the September 2020 quarter in contrast with the identical interval final yr. This was a significant contributor to India Inc’s financial savings on enter prices. Uncooked materials, and energy and gas prices had been down 13 per cent and 11 per cent yo-y, respectively.
For cement producers, who had been already reaping the advantages of consolidation, decrease enter costs gave an additional fillip to working earnings.
UltraTech Cement, for example, reported a 30 per cent spike in its EBITDA per tonne, owing to a 7 per cent and 12 per cent drop in energy and gas, and worker bills, respectively, within the September quarter.
Corporations additionally continued their pattern of pruning employee-related prices. Worker prices dropped by 7 per cent and a couple of per cent, respectively, within the June and September quarters.
The worker price lower was a lot larger for corporations working within the retail section. V-Mart, Aravind Fashions and Trent noticed their worker prices drop over 20 per cent within the September quarter.
Apart from the financial savings on account of work-from-home, pay-cuts and furloughs, corporations are additionally adopting different schemes to convey down worker prices. SAIL, earlier this month, introduced one such scheme, the place about 72,000 workers of the corporate will be capable to go for decrease working hours, in return for proportionate foregoing of their wage advantages.
Corporations within the FMCG and telecom sectors introduced down their commercial bills by three per cent and seven per cent respectively.
In providers, choose sectors equivalent to IT defied revenue declines to reap margin features from sharp reductions in enterprise journey and overheads, managing revenue progress.
The fee financial savings led to a robust spike of 42 per cent within the mixture working earnings of corporates (excluding banks and financials). Whereas working earnings improved, internet earnings acquired an added fillip from a 7.5 per cent drop in curiosity prices, because the sequence of fee cuts over the previous yr lastly started to trickle right down to debtors.
Consequently, the combination curiosity cowl ratio for India Inc virtually doubled to 5 occasions, from 2.6 occasions within the June quarter. A canopy of six occasions is deemed snug.
For a number of corporations, quicker transmission of fee cuts in short-term debt helped in substantial financial savings in borrowing prices for working capital. ONGC, for example, witnessed a 40 per cent (y-o-y) drop in its finance prices within the September quarter. This was as a consequence of each debt discount (to the tune of ₹1,800 crore) and the corporate choosing short-term CPs (business papers) with decrease rates of interest.
With companies shut in the course of the lockdown, most corporations skilled money crunch. Nonetheless, India Inc appears to have utilised this time to comply with up on receivables, and shifted its focus to money collections.
This, coupled with strict working capital measures, led to a big discount in debt for corporations within the September quarter. Shree Cement’s consolidated debt dropped to ₹1,477 crore within the September quarter, from ₹ 1,639 crore in March 2020.
Surprisingly, a lot of the debt discount in India Inc got here in confused sectors equivalent to infrastructure, metals and mining, oil refineries and telecom. A current report from Credit score Suisse has highlighted that whereas confused corporations acquired extra debt within the June 2020 quarter (₹23.Eight-lakh crore in mixture), the debt ranges for such corporations plunged to ₹15-lakh crore — down 37 per cent sequentially within the September quarter.
Credit score Suisse has categorized corporates as confused corporations in the event that they both incurred losses within the final couple of quarters, or their curiosity protection ratio was decrease than 1.
For a number of corporations, nonetheless, regardless of debt reductions, accounting changes acted as a bummer. Larsen & Toubro, for example, lowered its debt by ₹5,600 crore within the September quarter to ₹1.46-lakh crore, owing to the money surplus from its current sale of its electrical and automation division. Nonetheless, its finance prices inched up by 12 per cent in the course of the quarter, owing to cessation of curiosity capitalisation on the Hyderabad Metro undertaking. Tata Metal, too, lowered its debt by ₹Eight,200 crore within the September quarter, owing to buoyancy in home metal costs. Nonetheless, the corporate’s curiosity prices had been up four per cent on account of foreign exchange fluctuations — almost half of the corporate’s debt is in overseas foreign money.
Tax concessions assist
Whereas debt discount, coupled with moratorium on loans opted by sure corporations, helped ease the ache on money flows, tax outgo noticed a 31 per cent spike in the course of the quarter. Nonetheless, with many corporates choosing decrease tax charges, the tax incidence for India Inc (tax expense as a share of earnings earlier than tax) dropped to 24 per cent within the September quarter, in contrast with 44 per cent in September final yr.
In September 2019, the Finance Minister had introduced a decrease tax fee of 22 per cent (plus surcharge) for corporates which wished to forego most of their deductions. Corporations that steadily opted for the decrease tax charges needed to reverse their present MAT (minimal different tax) credit and different deferred tax belongings (created on the idea of exemptions, that are actually disallowed for the decrease tax regime). Owing to those reversals — and decrease earnings — the tax incidence surged to over 100 per cent within the March and June 2020 quarters.
General, it was a mix of decrease enter prices, price rationalisation measures, and declines in curiosity and tax outgo that helped India Inc handle a 39 per cent y-o-y internet revenue progress within the September 2020.
Thanks to those tailwinds, the quarter gave rise to a number of turnaround tales, too. Out of the 1,381 corporations that reported losses within the September quarter final yr, 460 returned to earnings this yr.
These embody corporations equivalent to Jindal Metal and SAIL that gained on the again of wholesome metal costs within the nation. Banks equivalent to Axis Financial institution, IDBI Financial institution, YES Financial institution and IDFC First Financial institution, too, noticed their earnings turnaround within the September 2020 quarter.
For the banking and monetary providers sector, nonetheless, it will pay to not learn an excessive amount of into the current numbers. For many banks, earnings had been optically larger on account of decrease provisioning prices, whereas reported gross non-performing belongings (GNPA) numbers noticed a a slight moderation.
However a lot of that is owing to the Supreme Courtroom order that mandated an asset classification standstill in the course of the moratorium interval. As soon as the moratorium is lifted, a possible surge in slippages within the coming quarters could mood revenue progress.