Corporate Performance

Published: Dec 29, 2021
Updated: Dec 29, 2021

Strong rebound in Q3-FY21

After a sharp deterioration in corporate performance (especially in the topline of corporates) in the first two quarters of FY21, expectations were riding high of a notable improvement in corporate earnings in the third quarter of the fiscal, on the back of festive season-led demand recovery. Corporate performance in Q3FY21 has been robust, as reflected by a marginal uptick in net sales and strong growth in net profits, indicative of a bright spot in the recovery prospects for the Indian economy. Improved consumer sentiment, festive season demand and further relaxations in pandemic-related restrictions, coupled with cost rationalization in some expenditures, have been the key factors leading to a strong rebound in corporate earnings in Q3FY21 compared with the previous two quarters. Additionally, pent-up demand for some discretionary spending, strong rural growth, and consumers preferring organized sector players amidst lingering pandemic uncertainty have supported the overall demand in the economy. Along with the improvement in net sales and net profits, even total expenditures have increased, which indicates that the cost rationalization measures employed in the previous two quarters have reversed to some extent, according to an indepth and comprehensive study by well-known rating agency Care Ratings.

The study assesses the corporate performance for Q3 FY21 based on a sample of 2,450 companies, sourced from Ace Equity. The study further delves into the industry-wise performance for 65 select industries while attributing reasons for certain specific industries.

Highlights

• For the aggregate sample (2,450 companies), net sales recorded a growth of 2.7% in Q3FY21 compared with a marginal fall of 0.8% in the corresponding quarter last year. The net sales of 2,062 companies (excluding banks and finance) have also registered a growth of 2.4% during Q3FY21 compared with a decline of 3.8% in Q3FY20. Therefore, sequentially net sales have improved after recording negative growth in Q1 and Q2 of FY21, as can be seen in the table. However, one needs to read the positive growth number in Q3FY21 with caution owing to the low base effect (negative growth in the corresponding quarter last year).

• Despite the improvement in net sales at the aggregate level, there are some industries like hotels/resorts/ restaurants, diamonds & jewellery, airlines, shipping, oil exploration and paper products which have recorded a double-digit fall in net sales yoy during Q3FY21.

• Net profits of the sample (2,450 companies) have seen a profound improvement of 67% in the quarter ended December 2020 on the back of improvement in net sales coupled with cost rationalization in some expenditures like raw material costs, power costs and interest costs. However, employee costs, operating & manufacturing expenses, and tax expenses have seen an uptick, which has capped the overall improvement in net profits. Also, a low base effect (-24.5% in Q3FY20) has led to a sharp growth in net profits in Q3FY21.

• Two industries which have seen high net losses include telecom service providers and HFCs, with an aggregate loss of Rs 23,662 crore during the quarter.

• Net profit margins at the aggregate level (2,450 companies) have improved sharply from 4.8% in Q3FY20 to 7.7% in Q3FY21.

• The interest coverage ratio has improved from 3.3 in Q3FY20 to 4.7 in Q3FY21 at the aggregate level (excluding banks and finance). However, there are some industries, namely airlines, hotels/restaurants, paper, retailing and telecom equipment, where this ratio has declined and has been below

• An assessment of the aggregate sample of 2,450 companies reflects encouraging signs as both net sales and net profits of the sample companies have recorded positive growth during Q3FY21 compared with the corresponding quarter last year. The 3rd quarter has seen a positive uptick in net sales as against a sharp fall of around 25% registered in Q1FY21 and around 4.5% in Q2FY21.

• Net sales have grown by 2.7% in Q3FY21 (yoy) compared with a marginal contraction of 0.8% in the corresponding quarter last year. 1,361 companies, which account for almost 70% of the net sales in Q3FY21, have registered positive growth in Q3FY21.

• Total expenditure grew by 4.1% in Q3FY21 (yoy) compared with de-growth of 3.1% in Q3FY20.- The growth in total expenditure has been on account of double-digit growth in operating and maintenance 42 Corporate India February 28, 2021 expenses (18.5%) and pick-up in employee costs (8.1%).

• The growth has been limited as cost of raw materials and services (-6.8%) and electricity, power and fuel costs (- 7.1%) have seen negative growth during the quarter.- The pick-up in total expenditure at the aggregate level does indicate that the cost rationalization undertaken by corporates during the first two quarters of the fiscal has been reversed to some extent.

• Operating profits of the sample companies recorded double-digit growth of 12.2% in Q3FY21 compared with 5.7% in Q3FY20 on the back of improved net sales and reduction in certain expenditures. Operating profit margins have also improved from 20.9% in Q3FY20 to 22.8% in Q3FY21.

• Net profits have grown robustly by 66.5% in Q3FY21 as against negative growth of 24.5% in Q3FY20. The net profit margin rose to 7.7% during the third quarter of this fiscal as against 4.8% in the corresponding quarter last year. This improvement has been on account of higher operating profits and fall in interest expenses. However, higher tax expenses have limited the growth in net profits. Higher tax expenses reflect strong profitability of the sample companies amidst low corporate tax rates.

• The performance of the companies (excluding banks and finance) has demonstrated promising signs as both net sales and net profits have recorded growth in Q3FY21.

• On the expenditure front, there has been some cost rationalization in terms of raw material costs and power costs while operating expenses and employee costs have picked up. Power costs have declined by 7.1% in Q3FY21, reflecting the fall in crude oil prices (Brent) by 30.2% in Q3FY21 (yoy).

• Operating profits have recorded a sharp double-digit growth of 25% in Q3FY21 as against negative growth of 2.3% in Q3FY20, which has led to a notable pickup in the operating profit margins to 19.4%.

• Interest expenses have also declined by around 3% during the quarter because of falling lending rates in the banking system. The one-year median MCLR has declined to 7.3% in December 2020 compared with 8.28% in December 2019. Likewise, even weighted average lending rates (WALR – Fresh Loans) have declined from 9.3% in December 2019 to 8.12% in December 2020. The fall in lending rates shows the transmission of the policy rate cuts undertaken by the RBI.

• Large operating profits and a fall in interest expenses have been the key reason for the net profit margin increasing from 5.2% in Q3FY20 to 8% in Q3FY21. Where sales have fallen

• At the aggregate level, net sales have registered a pickup, albeit marginally, in Q3FY21. However, some industries continue to be impacted by the pandemic and have seen a decline in net sales (yoy). The chart shows that there have been a mix of services (especially contact-intensive industries), manufacturing, trading and housing finance that have seen de-growth in net sales during the quarter. These industries account for around 7% of the net sales at the aggregate level. Employee costs

• Employee costs have registered growth in Q3FY21, which to some extent highlights higher disposable income in the hands of individuals in the formalized sector, which bodes well for the overall economy if consumer spending increases. One needs to note here that companies in certain industries have gone back to their original employee cost structures and have also announced bonuses/incentives to employees, which has led to an increase in employee costs in Q3FY21 vis-à-vis the negative growth in the previous two quarters. The matrix below juxtaposes the growth in net sales and employee costs to gauge whether an improvement in net sales has translated into growth in employee costs.

• One can observe that there are some industries like NBFCs, textiles, telecom service providers and real estate construction where, despite the growth in net sales, employee costs have fallen. This could be part of the cost rationalization measures undertaken by some companies in the respective industry.

• Broadly, robust growth in net sales in Q3FY21 has translated into higher growth in employee costs. However, the adverse impact on net sales of some industries like airlines, retailing, engineering, hotels/restaurants has translated into negative growth in employee costs as well.

• Analysing interest coverage (excluding banks and finance)at the aggregate level, interest coverage ratio has improved sharply from 3.3 in Q3FY20 to 4.7 in Q3FY21 on account of higher operating profits and a fall in interest expenses. However, there are some industries, as depicted in Chart 2, which have recorded a decline in the interest coverage ratio.

•Industries such as travel services (11.4), consumer food (8.7), oil exploration (4.8), and shipping (3.3) have recorded a decline in the interest coverage ratio but still are relatively comfortable in terms of debt servicing.? Airlines (1.5), educational institutions (1.3), hotels/resorts/ restaurants (-0.4), paper (1.8), retailing (0.8) and telecommunication equipment (0.5) have not only seen a decline but also in the interest coverage ratio.