Expert Opinion

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

CORPORATE PERFORMANCE IN Q2 FY22

Bounce-back after 2nd Covid wave

Corporate performance in the latest quarter has added to the optimism regarding the health of the underlying domestic economy. Company earnings have been strong despite economic and business activity yet to fully attain the pre-pandemic size in a broad-based manner. Besides, they had to contend with supply constraints and rising input costs, according to a study by Care Ratings.

Even as some of the solid readings on growth in Q2FY22 can be credited to a lower base effect (in Q2FY21, corporates were slowly emerging from the nation-wide lockdown under the first wave of the pandemic), there has been a bounce-back from the moderation seen in the previous quarter when corporates had to weather the second wave of the pandemic. Maintains the study report by Care Ratings, “we have analyzed here the quarterly earnings results of 2,113 companies covering around 40 industries and spanning the last 5 quarters as well as of the pre-crisis period, i.e., Q2FY20. The findings are:

The topline as well as the bottomline of corporates have seen an improvement in Q2FY22. The improvements are sequential, annual as well as over the pre-crisis period. In the latest quarter, net sales volumes at the aggregate level have surpassed the prepandemic period along with operating profit and net income. Operating profit margins were however squeezed by high raw material and input costs. Overall corporate performance is skewed towards the larger companies (turnover > Rs 250 crore).

Micro companies having net sales of under Rs 5 crore have witnessed a decline in sales volumes in the latest two quarters. The sales volume of these companies remains well below the levels of July-September 2019 (by over 70%). One-third of the companies that form the sample are yet to attain the sales volume of JulSep 2019.

Service sector — viz., the travel and high-contact intensive segment — revenues have trailed that of the manufacturing sector, finance and IT services. In terms of sectors, corporate performance in the quarter gone by was steered by energy, finance, iron & steel, IT, power, automobiles and telecom. Interest cover has improved across sectors.

Performance in Q2: Annual as well as sequential gains

Aggregate Corporate Performance

The performance of companies in the second quarter of three fiscals is analyzed. The latest quarter’s performance is assessed with a year ago (Q2FY21) as well with the prepandemic period (Q2FY20) to examine how it compares with that period. As business activity was adversely impacted by the pandemic-imposed restrictions and disruptions, corporate sales/revenues and income dropped sharply in FY21, especially in the first two quarters. The low base effect is thus prevalent in the current financial year and changes over Q2FY21 must be read with caution.

Table 1 captures the performance of 2,113 companies in the second quarter of three fiscals. At the aggregate level, growth in net sales in Jul-Sep 2021 is up 28% from a year ago and 22% higher than 2019. The increase in operating profit is 21% over 2020 and 31% over 2019. Operating profit margin at 22.7% in the three months to Sep 2021 is marginally lower than 23.8% in Jul-Sep 2020. Profit margin has improved to 11.03% in Sep 2021 from 8.61% in Sep 2020. Interest cover too has risen from 1.56 to 2.02 in this period.

Corporate Performance excluding the BFSI segment The aggregate level performance is mirrored when the BFSI (banking, financial services and insurance) segment is excluded from the sample (of 2,113 companies), taking the total number of companies to 1,775. The BFSI segment has a large share in turnover (20% in Q2FY22).

There has been a strong growth in sales not just from the year ago period (36% - Q2 FY21) but also compared with 2 years ago (25% - Q2 FY20). This can be taken as the waning of the impact of the pandemic and the resurgence in demand. In case of 328 companies or 18% of the sample, the net sales in Q2 were lower than year ago.

Raw material, power and operations and manufacturing cost have gone up relative to the year ago period as well as 2019. The global supply and logistics constraints, surge in commodity prices and shortages of energy has raised companies operating expenses.

Interest cost has been lower compared with 2019 and 2020. This can be put down to the fall in domestic interest rates (MCLR has declined by 77 bps since April 2020 and 151 bps since April 2019), deleveraging by companies and low fresh borrowings.

Operating profits are 29% higher than Q2FY21 and 35% above Q2FY20. The high growth in operating profits despite rising input costs is reflective of the improvements in capacity utilization, cost optimization and operational efficiencies of corporates. Operating profits margin was 18.8% in the three months to Sept 2021, marginally lower than 19.9% in the year ago period. Higher input cost has been eating into the margins.

Net profit margin has improved to 10.3% from 8.12% in Q2 FY21 and is sharply higher than the 2.4% of Q2 FY20.

On a sequential basis too, companies (excluding BFSI) have been witnessing improvements. Following the decline in June 2021 linked to the second wave of the pandemic, the severity of which was higher, sales and profit of corporates have picked up in the July-September 21 period, as highlighted in Chart 1. On a quarter-on-quarter basis, net sales have grown by 16% and net profit by 38% in Q2 FY22. While operating profit margin has moderated, albeit marginally on a sequential basis from 19.1% to 18.8%, profit margin has improved from 8.6% in June 2021 to 10.3% in Sep 2021. 366 companies or 21% of the sample witnessed a decline in net sales in Q2FY22 from the preceding quarter.

Size wise Analysis: Large corporates propelling overall growth

The size-wise analysis based on net sales (excludes BFSI) shows that the improvement in corporate performance is skewed towards the larger companies. These corporates have been spearheading the improvement in corporate performance. Based on their turnover in Jul-Sep 2021, the companies have been classified as micro (upto Rs 5 crore), small (Rs 5 crore - Rs 75 crore), medium (Rs 75 crore- Rs 250 crore) and large (> Rs 250 crore) This is in line with the central government classification of MSMEs.

The large companies that have net sales of over Rs 250 crore and which comprise 34% of sample companies accounted for 96% of the net sales, 96% of operating profit and 98% of PAT in Q2 FY22. The large companies have seen their volume of sales, operating profits and PAT surpass the pre-pandemic levels of Sep 2019.

Micro-sized companies (upto Rs 5 crore turnover) have witnessed a sequential decline in sales and the volume of sales is well below Sep 2019 (by over 70%). These companies comprise around 15% of the sample. Barring the micro companies, there has been a sequential improvement in net sales, operating profit and PAT in the latest quarter.

Sectoral Performance: Broad-based strength There has been broad-based growth in net sales on a sequential as well as annual basis across sectors. Turnover crossed pre-crisis levels for most sectors. Operating profits in Q2 FY22 have climbed from the previous quarter as well as the year ago period.

The snapshot of the sector-wise performance is included in Table 4. Of the 36 sectors analyzed, turnover was lower for mining on a sequential basis and for banks on an annual basis.

• Barring 5 sectors, the turnover in the latest quarter has crossed the levels of Sep 2019 for the other sectors. Aviation, retail, media & entertainment, hospitality, and diamond & jewellery are the sectors where the sales/revenue turnover is lower than the pre-crisis period (Jul-Sep 2020). It is the lowest for diamond & jewellery by 43%, followed by hospitality (-35%).
• The energy and finance sector accounted for 45% of the turnover and 66% of operating profits in Q2 FY22.
• The operating profit margin in the latest quarter was the highest for the finance sector at 82% and was followed by telecom at 45%.
• For 14 sectors (out of 36) the operating profit margin was in the range of 20% to 45% and for 21 sectors it was between 5% and 19%.
• Profit margins in the latest quarter were positive for 32 of the 36 key sectors analyzed. The hospitality, retail, aviation and telecom sectors have registered negative profit margins.
• Profit margin was over 25% for the mining, IT and finance sectors, and 15% to 20% for iron & steel, power, gas transmission, non-ferrous metals and FMCG. The profit margin for over half (20 out of 36) of the sectors analyzed has ranged between 1% and 10% in Q2 FY22.
• The interest coverage ratio was 2 and above across sectors, with the exception of banks (ratio of 1).
• The interest coverage ratio of manufacturing companies and IT was higher.

Input price pressures

Corporates across sectors were faced with input price pressure in the latest quarter, which impacted their operating profit margins despite robust sales growth. Industries where sales growth has been lower than the rise in raw material prices have been adversely affected and it can be inferred that companies in these industries have been unable to fully pass on the rise in raw material costs. The year-on-year growth in net sales has been lower than the growth in raw material prices for most industries. At the aggregate level, while the growth in net sales (year-on-year) in Q2 FY22 was 36%, the increase in raw material prices was 53%.

Table 5 lists the sectors (24) where the sales growth has been lower than the rise in raw material prices. These sectors have faced margin pressures.

Diamond & jewellery, telecom, paper and aviation are among the few sectors that have witnessed higher growth in sales than in raw material prices in Q2 FY22 (on year-onyear basis).

Aluminium The industry’s performance was supported by favourable macros, a strategic product mix, higher volumes and stability in operations. Revenue was up YoY due to higher shipments, global aluminium prices and market premiums. Total shipments of flat rolled products (FRPs) were up YoY, with strong demand across endproduct markets particularly beverage packaging and specialty products, partially offset by continued headwinds in the automotive industry on account of the semiconductor chip shortage. Cost of production during Q2 was impacted by higher input commodity prices and power costs. Despite a challenging cost environment, the industry witnessed steady volume performance across business segments, and sustained margins, benefitting from strong aluminium prices on the London Metal Exchange (LME), which touched an all-time high in September. Aluminium LME price ($/MT) registered 55% growth (YoY) in this quarter (Q2)

Aviation The aviation industry continues to be one of the most hard-hit due to the pandemic and resultant restrictions on mobility and travel. The receding impact of the

Covid-19 second wave, momentum in vaccinations and subsequent relaxations of curbs have helped revive the travel sentiment. Revenues are expected to get a boost from additional capacity deployment in the forthcoming quarters. However, the unrelenting increase in oil prices is a major negative for the airlines industry.

Automobiles The demand conditions witnessed improvement in Q2 after disruptions caused by the second wave in the previous quarter. However, supply-side challenges such as shortages of key electronic components and high commodity inflation impacted the capacity utilisation levels. The performance of the automobile industry is likely to improve with easing supply side issues and recovery in demand.

Capital goods The industry had a strong quarter (exceeding pre-Covid levels) driven by a robust recovery in all key market segments, resulting in strong order booking. Solid customer-connect and strong backlog execution led to the positive movement in Q2. The quarter was marked by orders in identified growth sectors (data cen- tres, railways and metro, among others). A healthy deal pipeline and good traction was also witnessed in - Electric Autonomous & Connected Vehicle (EACV), 5G, Med-tech, AI & Digital Products, Digital Manufacturing and Sustainability. The broad-based growth was accompanied by a rise in operating margins mainly on account of better capacity utilization, revenue mix, operational efficiency and cost optimization. Profitability improvement was witnessed across all segments despite external headwinds like increasing commodity prices and supply disruptions in electronic components.

Ceramics Operating margins were under pressure in Q2 due to burgeoning gas prices, freight rates and other input costs. Strong customer sentiments, revival in B2B business and revival in the construction sector are expected to support growth in the coming months. The combination of benign interest rates, and the pandemicinduced preference for larger spaces, supported by government incentives for the real estate sector have provided a significant and sustainable tailwind for the industry. Also, the inclination towards home upgradation and home improvement will serve to sharply elevate demand in the future.

Consumer Durables Momentum in demand for home consumption products continued in Q2. Pent-up demand post easing of Covid-19 restrictions contributed to growth in the Unitary Cooling Products (UCP) and small appliances segment. Festival demand and return to normalcy is expected to aid demand in the coming quarter. Challenges in terms of high prices of metals, plastics, electrical components and logistics costs are likely to continue, putting margins under pressure.

Drugs & Pharmaceuticals Performance of the drugs and pharmaceuticals industry remains strong owing to momentum in the branded prescription and trade generics business. Revenues of the pharma companies was driven by non-Covid treatments, demand for antiinfectives in the peak monsoon season, greater health consciousness and a healthy order flow across regions.

Engineering - Construction The industry performed well on account of a healthy and well-diversified order book, strong tailwinds in the IT & TS portfolio and better overhead recovery despite commodity headwinds. Q2 order inflows from infrastructure, heavy engineering, realty and industrial machinery businesses aided revenue growth. Good performance was witnessed across all segments such as T&D, civil, railways and cables. However, the margins have been impacted by the elevated raw material prices.

FMCG Revival in out of home consumption/discretionary spending, strong performance of household care products and growth in eCommerce has backed the strong performance of the FMCG industry. The FMCG industry is facing input inflation and hence has resorted to calibrated pricing actions. Demand from the rural segments has witnessed a slowdown in the second quarter of FY22, whereas increased mobility is expected to boost urban demand in the coming quarter.

Hospitality The hospitality industry witnessed green shoots of recovery in Q2. The subsiding 2nd wave of the coronavirus in the country and improved mobility levels have boosted travel sentiment. The leisure and business travel segments have witnessed a recovery in the current quarter.