When the going will get powerful, the powerful 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 firms which have reported their numbers (excluding banks and financials) exhibits a powerful sequential enchancment within the top-line (up 37 per cent) and web income (up 470 per cent), due to firms 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 achieve pre-Covid ranges.
Web revenue noticed an enchancment of 31 per cent year-on-year.
What have been the developments underlying this revival? Right here’s a deeper dive into India Inc’s outcomes scorecard.
Demand but to get better totally
India Inc had been grappling with weak demand owing to financial slowdown even earlier than Covid made its look and the nationwide lockdowns have been imposed. After witnessing muted progress for a lot of quarters, mixture revenues of listed firms (excluding banks and finance firms) 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 firms slumping by 6.8 per cent and 34 per cent, respectively.
With most consumer-facing companies resuming operations in July-August 2020, the top-line of listed firms noticed a sequential enchancment of 37 per cent within the September quarter. However compared with the corresponding quarter final 12 months, the mixture revenues have been nonetheless decrease by 6.7 per cent. If one remembers that the September 2019 quarter was in itself a muted one, this means that mixture demand is but to get better to pre-Covid ranges. Take, as an illustration, Ashok Leyland — the heavy automobile producer’s gross sales greater than doubled sequentially within the September quarter, owing to pent-up demand throughout the lockdown. Nevertheless, the corporate’s web gross sales at ₹ 3,835 crore throughout the quarter have been down 24 per cent over the corresponding quarter final 12 months — which was already a weak interval with revenues down over 40 per cent.
Different automobile producers resembling Tata Motors, Eicher Motors and Bajaj Auto, too, noticed sequential surge in gross sales, however their revenues are nonetheless under than that in final 12 months’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 12 months stays to be seen.
Equally, firms within the hospitality and aviation industries, which noticed an entire washout on revenues within the June 2020 quarter, posted wholesome sequential progress within the September 2020 quarter. The revenues of Interglobe Aviation, as an illustration, tripled sequentially.
However compared with the September quarter final 12 months, the corporate’s revenues have been down 66 per cent to ₹2,741 crore. For these sectors, the easing of presidency restrictions on occupancy and capability might maintain the important thing to a extra sturdy revival.
Price cuts enhance margins
Whereas income progress was no nice shakes, a standout characteristic of India Inc’s outcomes for the quarter was the numerous value financial savings, which noticed manufacturing firms ship a a notable spike of their working margins.
Of the three,827 firms that reported their September quarter numbers, 2,537 have 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 have 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 have been additionally a lot greater 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 12 months. This was a serious contributor to India Inc’s financial savings on enter prices. Uncooked materials, and energy and gasoline prices have been down 13 per cent and 11 per cent yo-y, respectively.
For cement producers, who have been already reaping the advantages of consolidation, decrease enter costs gave an additional fillip to working income.
UltraTech Cement, as an illustration, 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 gasoline, and worker bills, respectively, within the September quarter.
Firms 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 value minimize was a lot greater for firms working within the retail phase. 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, firms 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 have the ability to go for decrease working hours, in return for proportionate foregoing of their wage advantages.
Firms within the FMCG and telecom sectors introduced down their commercial bills by 3 per cent and seven per cent respectively.
In providers, choose sectors resembling IT defied revenue declines to reap margin beneficial properties from sharp reductions in enterprise journey and overheads, managing revenue progress.
The fee financial savings led to a powerful spike of 42 per cent within the mixture working income of corporates (excluding banks and financials). Whereas working income improved, web income obtained an added fillip from a 7.5 per cent drop in curiosity prices, because the collection of price cuts over the previous 12 months lastly started to trickle all the way down to debtors.
Consequently, the mixture curiosity cowl ratio for India Inc nearly doubled to 5 instances, from 2.6 instances within the June quarter. A canopy of six instances is deemed snug.
For a number of firms, quicker transmission of price cuts in short-term debt helped in substantial financial savings in borrowing prices for working capital. ONGC, as an illustration, witnessed a 40 per cent (y-o-y) drop in its finance prices within the September quarter. This was attributable to each debt discount (to the tune of ₹1,800 crore) and the corporate choosing short-term CPs (industrial papers) with decrease rates of interest.
With companies shut throughout the lockdown, most firms skilled money crunch. Nevertheless, India Inc appears to have utilised this time to observe up on receivables, and shifted its focus to money collections.
This, coupled with strict working capital measures, led to a major discount in debt for firms 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 careworn sectors resembling infrastructure, metals and mining, oil refineries and telecom. A current report from Credit score Suisse has highlighted that whereas careworn firms acquired extra debt within the June 2020 quarter (₹23.8-lakh crore in mixture), the debt ranges for such firms plunged to ₹15-lakh crore — down 37 per cent sequentially within the September quarter.
Credit score Suisse has labeled corporates as careworn firms 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 firms, nevertheless, regardless of debt reductions, accounting changes acted as a bummer. Larsen & Toubro, as an illustration, decreased 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. Nevertheless, its finance prices inched up by 12 per cent throughout the quarter, owing to cessation of curiosity capitalisation on the Hyderabad Metro venture. Tata Metal, too, decreased its debt by ₹8,200 crore within the September quarter, owing to buoyancy in home metal costs. Nevertheless, the corporate’s curiosity prices have been up 4 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 firms, helped ease the ache on money flows, tax outgo noticed a 31 per cent spike throughout the quarter. Nevertheless, with many corporates choosing decrease tax charges, the tax incidence for India Inc (tax expense as a share of income earlier than tax) dropped to 24 per cent within the September quarter, in contrast with 44 per cent in September final 12 months.
In September 2019, the Finance Minister had introduced a decrease tax price of twenty-two per cent (plus surcharge) for corporates which wished to forego most of their deductions. Firms that progressively opted for the decrease tax charges needed to reverse their current MAT (minimal various tax) credit and different deferred tax property (created on the premise of exemptions, that are actually disallowed for the decrease tax regime). Owing to those reversals — and decrease income — 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, value rationalisation measures, and declines in curiosity and tax outgo that helped India Inc handle a 39 per cent y-o-y web 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 firms that reported losses within the September quarter final 12 months, 460 returned to income this 12 months.
These embody firms resembling Jindal Metal and SAIL that gained on the again of wholesome metal costs within the nation. Banks resembling Axis Financial institution, IDBI Financial institution, YES Financial institution and IDFC First Financial institution, too, noticed their income turnaround within the September 2020 quarter.
For the banking and monetary providers sector, nevertheless, it will pay to not learn an excessive amount of into the current numbers. For many banks, income have been optically greater on account of decrease provisioning prices, whereas reported gross non-performing property (GNPA) numbers noticed a a slight moderation.
However a lot of that is owing to the Supreme Court docket order that mandated an asset classification standstill throughout the moratorium interval. As soon as the moratorium is lifted, a possible surge in slippages within the coming quarters might mood revenue progress.