Cautious optimism

Corporate results are showing turnaround signs

A look at the results of 470 listed companies (with minimum revenues of Rs 1 crore) suggests that the second quarter of 2020-21 did see the beginning of an economic revival. Sectors like fast-moving consumer goods (FMCG), information technology (IT), auto ancillaries, steel, and cement all did well. However, this assessment of strong performance must be hedged for several reasons. For one thing, the corresponding quarter (July-September 2019) saw weak corporate performances, creating a low base. The first quarter (April-June 2020) was terrible due to the harsh lockdown. At first glance, the companies saw extraordinary profit expansion year-on-year. While total income for this sample fell by 4 per cent (despite a 26 per cent expansion in other income), operating profits were up 45 per cent and profits after tax (PAT) rose by 4,083 per cent from Rs 2,167 crore to Rs 90,676 crore.

However, in the previous financial year, telecom companies Bharti Airtel and Vodafone Idea both declared record losses, amounting to over Rs 73,000 crore, as they accounted for the adverse judgment in the adjusted gross revenues case. This overhang has disappeared, hence the telecom service providers declared “normal” results, accounting for most of the profit expansion, though they had relatively small net losses. Another big gainer in accounting terms was the refining sector. Bharat Petroleum and Indian Oil reported large profit increases due to gains in the value of the inventories held by them. Essentially, the rising price of crude oil and gas compared to the previous quarter (April-June 2020) has resulted in this adjustment. Indian Oil has seen PAT rising to Rs 6,052 crore from Rs 468 crore in the corresponding quarter of the previous financial year. This gain is obviously dependent on crude oil price remaining stable. Nevertheless, if the refining and telecom sectors are removed from this sample, the numbers still look healthy with a 25.8 per cent expansion in PAT and 9.9 per cent rise in operating profit. A third “volatile” sector, banking, also seems to have done well.

The 18 listed banks, which reported results till Saturday, saw profits more than doubling with a 113 per cent rise. Apart from ICICI Bank, which delivered terrific numbers, UCO Bank, Bank of Baroda, and IDBI Bank all reported turnarounds with a strong profit expansion. There was credit expansion as well as higher profits. The caveats about these banking results should be noted, since the non-banking financial companies did not seem to have registered similar gains. FMCG did well year-on-year with the sector seeing a 12 per cent expansion in sales, and 10.4 per cent rise in PAT. IT saw flatter results with a 4 per cent rise in net sales coupled with around 5 per cent rise in PAT. All the IT majors have optimistic advisories. Pharmaceuticals also seem to be flat while auto ancillaries have done better than automobiles as such. Ancillaries saw a 7.5 per cent rise in PAT coupled with a 1.5 per cent rise in sales. Automobiles continue to struggle with an 8.6 per cent drop in sales and 9.8 per cent drop in PAT.

Once the anomalies are accounted for, the pattern does give some cause for optimism. FMCG performance indicates that some consumption demand is returning, and better performance from steel and cement does suggest that infrastructure activity is picking up.