Analysis

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

CORPORATE PERFORMANCE Q1FY22

Good show, but on low base

India Inc has started the new fiscal year 2022 on a highly encouraging note. According to a study by Care Ratings, corporate performance as represented by a sample of 3,008 companies reveals that there was a sharp increase in net sales and net profits mainly due to the base effects. Growth rates get moderated significantly when aggregates are compared over 2019. A size-wise analysis shows that the smaller companies with quarterly sales of less than Rs 10 crore each witnessed a decline in sales compared with 2020. Further, except for the group of above Rs 500 crore, all other segments witnessed lower sales in 2021 compared with 2019.

More than half the sample companies had not yet reached the sales level of 2019 in the first quarter. Clearly, there is a long distance to be travelled here.

SECTOR LEADERS

An industry-wise analysis shows that there were 6 clear leaders in terms of growth in sales: banks, finance, IT, telecom, healthcare and agricultural products. Most services were pushed back and while growth was high compared with 2020, they had not reached the 2019 level. Overall, 18 of the 36 sectors considered here had sales levels lower than in 2019.

LOCKDOWN PRISM

The performance of companies was bound to be good, if not exaggerated, in Q1 of this year due to the base effect. It may be recollected that last year, the lockdown meant that there was limited activity even in manufacturing for two months. The situation this year was different even though there were regional lockdowns as manufacturing got differentiated from services. Even for services, conditions were marginally better given that the rules of engagement were different for some of them in certain states. The results hence have to be viewed Good show, but on low base keeping in mind these qualifications.

Aggregate performance

The table 1 gives a summary of the performance of 3,008 companies for Q1. Figures for the last three years have been provided, as well as growth rates in 2021 and 2020. In an attempt to even out the base effect in 2021, the last column reckons growth over 2019 which, as can be seen, moderates the picture considerably. Growth in sales was impressive at 43% in 2021 but gets diluted to 3.5% when compared with 2019. Therefore, while there has been improvement in sales, it is still not very steady.

• Raw material costs have gone up sharply in 2021 relative to 2020, which is in accordance with the higher commodity prices being witnessed. But again, when compared with 2019, the increase is marginal at 0.3%. During the pandemic there was a tendency for commodity prices to fall as demand slackened sharply. A similar picture is seen for power costs which have declined compared with 2019. Here, it is more due to physical consumption of power rather than price as the latter has been steady. Lower production and lockdowns in 2020 meant a decline in demand for power.

• Staff costs’ increase, according to the Care Ratings study, is interesting because growth of 12.4% means that companies have been increasing both the headcount as well as salaries of staff. In 2020, companies tended to cut back on salaries in a bid to check costs as establishments remained closed for 2 months.

• Interest costs exhibit a decline both when compared with 2019 as well as 2020. This is again due to a combination of two reasons. The first is that companies have tended to borrow less money from banks. In the first quarter, there was a decline in credit by 1%. In case of both manufacturing and services, growth was negative at 1.7% and 1.1% respectively. The second factor was the cost of capital, which had come down over time. The average MCLR was down by around 25 bps. The WALR for fresh loans had come down by 62 bps between June 2020 and June 2021.

Clearly, the push given by the RBI of lowering the repo rate and enhancing liquidity in the system to maintain a net surplus of Rs 4-5 lakh crore helped corporates in managing their interest costs.

MSEs SUFFERED

While the overall performance does show that corporate performance has been very buoyant relative to 2020 and marginally better than 2019, a size-wise analysis shows that the performance was driven by the larger companies defined as those with quarterly sales each of above Rs 500 crore. The table 2 shows that for the very small companies with sales of less than Rs 10 crore, growth in sales was negative in 2021, meaning thereby that the second round of lockdown has pushed these MSE enterprises even further back this year. For the other companies in the three ranges of Rs 10-25 crore, Rs 25- 100 crore and Rs 100-500 crore, while there was an improvement in sales in 2021 over 2020, it was still lower than that in 2019. Therefore, it was just 14% of these groups which had sales crossing the 2019 level.

Interestingly, of the 3,008 companies, only 1,335, which is 44% of the sample, had sales which were higher than that in 2019. This means that nearly more than half the sample companies have not yet reached their 2019 levels. Further, if 224 companies are excluded which registered less than Rs 1 crore increase in sales, the proportion comes down to 37%. 711 companies had witnessed lower sales in 2021 relative to 2020.

In terms of profits, the companies in the range of Rs 0- 10 crore and Rs 10-25 crore witnessed losses for the second successive quarter. Again, roughly half the companies witnessed lower profits in 2021 relative to 2020, the Care Ratings study adds. Therefore, the picture emerging is that the performance has been driven more by the larger companies and that roughly half the sample has still not recovered from the double lockdown.

DIFFERING FORTUNES

It has been observed that the lockdown had affected sectors in a disparate manner. Those in manufacturing and in the essential category which includes healthcare, FMCG including food products, and to an extent infra-based like metals and cement, tended to do better than others in both the rounds of lockdown. Services like hotels, foreign tradebased, entertainment, retail, etc., did tend to encounter challenges due to the differing rules of engagement. The table 3 gives information of growth in sales of industries which have not yet recovered.

The table shows that as many as 18 industry groups have yet to reach the 2019 turnover level, even while growth in 2021 compared with 2020 has been very impressive. Of these, 8 are in the services sector, which is significant as it vindicates the view that this segment has not yet recovered from the lockdowns. Four of them are directly related to household spending, which again indicates that there is still a long distance to be covered before normalcy can be restored, and the explanation of pent-up demand is not really sustainable.

The industries that have done well due to either inherent buoyancy or a recovery, which are mainly in the manufacturing segment barring BFSI, are presented in the table.

UNAFFECTED BY LOCKDOWN

There were 18 industries which witnessed high growth in sales in 2021 compared with 2020 and 2019. However, as can be seen, 12 of them had witnessed negative growth in sales in 2019 and hence had inflated growth in 2021. The 6 leaders with positive growth in 2019 as well as 2021 (over 2019) were banks, finance, agri, telecom, IT and healthcare. These industries were impervious to the developments taking place on the lockdown front and hence were able to witness sustained growth. These would also be the sectors that will be driving economic growth this year.

PERFORMANCE DRIVERS

Automobiles: The industry, after witnessing growth in H2FY21, recorded a slowdown in momentum with the onset of the 2nd wave of the coronavirus. However, the performance in Q1FY22 continues to be impressive on account of the less stringent restrictions viewed against the complete lockdown of last year, i.e., Q1FY21. Moreover, automobile exports picked up on account of a rebound in international demand. Lower capacity utilisation levels, weak domestic demand, adverse commodity prices, supply side disruptions and semi-conductor shortages were the is- August 31, 2021 Corporate India 33 sues faced by the automobile industry in the first quarter of FY22. The performance of this industry is likely to witness a gradual improvement contingent upon the evolving nature of the domestic Covid-19 situation and pick-up in demand.

Infotech: The performance of the IT industry has been impressive on account of large deal flows and growth across all industry verticals. All geographical markets registered healthy growth in Q1FY22. However, the resurgence of Covid-19 infections decelerated the pace of growth in India and Asia Pacific. Cloud Services, Cyber Security, Analytics & Insights, and Enterprise Application Services have been the main drivers of growth momentum in Q1FY22.

FMCG: The industry has shown resilience in Q1FY22 primarily on account of the learnings from last year. The FMCG industry benefitted from continuation of business activities amid staggered lockdowns as against the complete closure in Q1FY21. However, the spread of Covid-19 infections into the rural segments weighed upon demand. Though consumer discretionary spending witnessed a sequential derailment in the first quarter of FY22, it continued to be higher supported by the eroded base of last year. With imposition of curbs and restrictions on mobility, the tendency for stocking up of convenience foods and other consumer products has been relatively less compared with that of last year. The momentum in demand for personal care and hygiene continued.

Consumer durables: The industry has witnessed negative growth relative to the 2019. Subdued consumer demand weighed on sales of electronic consumer durables. The peak season sales of summer products were affected by the localised restrictions imposed across states. The industry players dominant in the international markets benefitted from encouraging exports growth. Escalation in costs of electronic components, metals and other inputs have led to erosion of margins. This industry is expected to benefit from exports and higher demand for home comfort products driven by the WFH culture.

Airlines, leisure travel, hotels & restaurants: These segments were hard-hit by the resurgence of Covid19 and renewed curbs on mobility. However, leisure travel witnessed a rebound in June 2021 on the back of increased demand for staycations and weekend getaways amid easing of restrictions. Closure of restaurants affected the dinein segment for a significant period in the first quarter. However, the delivery segment boosted the revenues in this sector. Recovery was faster towards June 2021 with gradual reopening of restaurants with restrictions on timings and occupancy. The domestic travel restrictions and bleak prospects for international operations affected the revenues of the airlines sector during the first quarter of FY22. However, revenues are believed to have witnessed a rebound in June 2021, albeit at a lacklustre pace. Apart from the harsh 2nd wave of Covid-19 in the country, the rising fuel prices are considered a big negative for the revenue in the airlines industry.

Retailing: The business continued to witness recovery aided by revival in demand as restrictions were eased in states recording a fall in infection rates. Moreover, social distancing protocols and restrictions on movement of individuals boosted the e-commerce uptake.

Sugar, textiles, paints and paper: These industries witnessed a derailment in growth. Sugar sales were lower on account of the pandemic-led disruptions. Sugar inventories are likely to ease on the back of strong export fundamentals and diversion towards ethanol production. There has been a slowdown in the progressive growth of the textile industry. However, unlike last year, the impact across manufacturing units has been largely un- even due to localised lockdowns of varying intensity imposed across states. Paints witnessed a slowdown in demand momentum during April-May 2021. However, it witnessed a recovery in June 2021. Growth in the domestic decorative business was aided by demand from tier 1/2 markets vis-àvis demand from tier 3/4 markets in the same quarter last year. Strengthening material inflation and erosion of margins was a major challenge faced by the industry. The sales of paper products are likely to improve with the subsiding 2nd wave of the coronavirus and easing of restrictions. Gradual re-opening of educational institutions is further likely to boost the demand for paper products.

Drugs and pharmaceuticals: The demand for branded prescriptions, trade generics and consumer wellness products remained robust. Further, this sector received a boost from the products launched by players dominant in the international markets. Hospital and healthcare services have been impacted by the greater number of individuals requiring emergency coronavirus related care and hospitalisations. Augmentation of the existing facilities to treat the rising coronavirus caseload resulted in a lower surgery count during this quarter.

Iron and steel: Overall demand was impacted during Q1FY22 with intermittent disruptions caused due to the second wave of Covid, but domestic demand in segments like railways, process industry and elevators remained stable. Demand from consumer-facing segments like auto and pipes & tubes recovered by the end of the quarter. The industry performed well due to better preparedness in terms of safe practices, improved cost management, supply chain optimisation, production alignment with demand, and enhanced automation. The government’s focus on developing sustainable infrastructure with low life-cycle cost material, and an improving economic outlook, are likely to further boost stainless steel demand in the coming quarters.

Aluminium: The industry’s performance in Q1FY22 was driven by robust volume growth and higher price realisation as aluminium margins were at record highs in the June quarter, led by firm base metal prices. Aluminium LME price ($/MT) registered a 60% growth yoy growth this quarter backed by strong macro conditions and an upswing in demand for innovative and sustainable aluminium products.

Non-ferrous metals: The industry was driven by recovery in metal prices and higher volumes in line with the robust demand. Zinc and lead prices increased by 49% and 27% during the quarter on a yoy basis. The rise in cost of production (COP) on account of higher commodity prices for coal, cement and diesel was balanced by better capital management and structural cost initiatives.

Capital goods: Growth in sales in Q1FY22 was higher due to the negative base. However, when compared with the corresponding quarter of FY 2019, sales figures are still lower. It shows that recovery is still in progress. The impact of Covid was countered to some extent due to a strong order book driven by industries and railways. Extensive use of remote management and digital solutions, coupled with a diverse product mix, ensured a resilient topline performance in a challenging market.

Engineering (construction): The industry witnessed net sales and margin growth yoy on account of a healthy order book, improved overhead recovery and better execution of projects despite the second wave. Higher handover of residential flats in the realty business, better progress of projects in Smart World & Communication, and higher demand in the Construction Equipment and Rubber Processing Machinery business aided revenue growth.

Cement: Net sales in the cement industry registered a growth in Q1 yoy backed by strong growth in volumes. Firm cement prices, coupled with the strong performance of special cement, led to improved realisations and better profit margins. Individual Home Builder (IHB) demand across states led by rural and urban housing contributed to the industry’s growth. Effective fuel source management dampened the impact of input cost (coal prices) increase.

Ceramics: The industry also reported stable margins in Q1 FY22 due to realisation gains, operational efficiency and cost control measures, despite increasing input costs.

Power: Net profit yoy in the power segment grew in Q1FY22 against Q1FY21 due to impressive revenue growth during the quarter. Despite the partial lockdown during the quarter, the electricity consumption showcased significant growth through the quarter, registering a growth of 17% yoy to 340 bu. This was driven by a strong pick-up in economic activity coupled with a low base effect. Peak demand reached an all-time high of 197 GW in June 2021. The consistent strong financial performance of power companies is backed by robust growth in capacities and an improved solar and wind capacity utilization factor (CUF).

Realty: The industry witnessed encouraging demand in the residential business despite disruptions caused due to the second wave. A temporary slowdown was reported in the rental business as most of the companies continue to operate remotely. New sales exhibited sustained momentum during the quarter on a yearly basis. However, overall sales in the top seven markets took a hit on a sequential basis. Revenue from operations registered sharp growth yoy because of ready-to-move-in homes with an occupancy certificate (OC). Property prices remained stagnant in tier I cities on a qoq basis and increased 2% on a yoy basis. The growth in the housing market was led by Mumbai and Bengaluru during this quarter as the market sentiments were boosted by historic low home loan rates and government interventions like stamp duty waivers.

Pesticides: Net sales growth for pesticides yoy during the quarter inched up on the back of strong demand and robust volume growth. Better realisations due to favourable commodity prices (~+14% for foodgrains, ~36-48% for cash crops, pulses, etc.) led to improved profit margins despite increased cost pressure. A good monsoon and availability of water boosted farmer sentiment and resulted in good growth in the rabi season 2020, which in turn supported the industry’s performance in Q1.

Ports: Growth yoy in net sales was aided by the low base of the year-ago quarter, coupled with recovery in the global economy during 2021 that helped cargo volumes. Revamping of the cost structure, efficient capital management and operational efficiency helped in improving overall the industry’s performance.

Crude oil: The segment witnessed higher net profit for the quarter ended June 2021 as compared to the corresponding quarter of the previous financial year, mainly on account of inventory gains and better petrochemical margins during the current quarter. Additionally, a lower base resulted in strong yoy recovery. On a qoq basis, domestic demand was impacted by the second wave-led lockdowns. However, an increase in the benchmark gross refining margin and higher crude oil prices aided the industry during the period. Brent crude averaged $ 68.83/ bbl, up 13% qoq at an 11-quarter high, supported by robust global fuel demand and supply management by OPEC+.

Telecom: The industry was mostly unaffected by the second wave. Growth in net sales yoy was observed during the quarter on account of improving realisations and a sustained increase in the 4G customer base. The connectivity business sustained its momentum despite the Covid 2nd wave as telecommunication services were covered under essential services.