 "Corporate India runs at two speeds")
The two years of Bharatiya Janata Party rule hasn’t made much difference to the financial fortunes of corporate India.
Revenues, operating profit and net profit of the 865 companies that have declared their financial results for the March quarter have hardly changed in the eight quarters of Modi’s rule.
In the March quarter, companies reported a combined net profit (adjusted for exceptional items) of Rs 59,974 crore, down 12 per cent from Rs 68,245 crore in the March 2014 quarter. During the period, net sales were up 2.6 per cent to Rs 7.03 lakh crore, from Rs 6.86 lakh crore.
Companies, excluding those in financials and energy, have done better with a cumulative 13.5 per cent and 19 per cent growth in net sales and adjusted net profit, respectively, during the period.
Financial stress is mostly restricted to companies in metals, construction and infrastructure, capital goods, power, textile and paper. Only a few of the top companies from these sectors have declared their results for the March quarter so far.
“It has been more of the same in the past two years. Consumer-driven companies continue to do well, as has been the case since the 2008 Lehman crisis. I expect the trend to continue for at least a few more quarters as the government plans to stimulate the economy through fiscal expansion, leading to a better demand scenario for consumer goods companies,” says Dhananjay Sinha, head of institutional equities, Emkay Global Financial Services.
This is evident in the performance gap between the early-bird companies and the entire universe of around 3,500 (see chart). For example, during the December 2015 quarter, early birds — mostly financially stronger companies in sectors such as private banks, IT services, pharma, automobiles, consumer goods and cement — reported a 3.6 per cent year-on-year (y-o-y) decline in net profit against a 7.2 per cent decline for the entire sample. Similarly, their revenue was down only 1.1 per cent y-o-y against a 2.8 per cent decline reported by the entire sample.
The consumer goods sector also gained from a sharp decline in energy and raw material prices, especially during the second half of Narendra Modi rule. For the ex-financials and energy space, raw material and energy intensity of production is down nearly 450 basis points (bps) in two years. One basis point is a hundredth of one per cent.
In the March 2014 quarter, of every Rs 100 worth of net sales, companies bought Rs 42 worth of raw materials and energy. This is now down to around Rs 37, thanks to an international meltdown in commodity prices. While a part of the gains has been eaten by higher employee and interest costs, the core operating margin is up 175 bps in the past two years. This saved the day for Corporate India despite six consecutive quarters of low single-digit revenue growth.
Infrastructure and investment-related sectors have not seen much improvement in the two years. Investment and capex-related sectors suffer as companies have either scaled back their growth plans or put new projects on hold. The combined fixed assets of around 3,000 companies (ex-financials) whose balance sheet was available for either FY16 or its first half was down 4.9 per cent over the previous period.
This has hit capital goods makers, construction and infrastructure entities. While their revenue has been stagnant in the past two years, many of the companies in the sector have turned loss-making due to a combination of poor growth and mounting interest costs.
Now, all eyes are on the gains from the planned fiscal stimulus by the Modi government during its remaining tenure. This should boost corporate growth in the short run, but no one is certain about the long term. The previous government tried to stimulate the economy after the global financial crisis but this was undone by the subsequent rise in fiscal deficit and a spike in international crude oil prices. Will Modi be luckier?
