Will profits growth of over 30% in Q2 sustain?
Large companies are cornering bigger market shares. Their turnovers are rising at the cost
of other declining turnovers of smaller and medium-sized firms. Consolidation is likely as
either the companies will sell out or clients will agree to pay a higher price and reach out
to the bigger brand and more trusted company in virtually every sector.
The economy has shrunk by 7.5% in the second quarter against a 23.9% contraction in the
first quarter, signalling that business reopening has had a positive impact. Now RBI’sGovernor is projecting a contraction of 7.5% for FY 2021 against previous estimates of acontraction of 9.5%.
The construction sector has sprung back from the first quarter’s
debacle of 50.3% to a contraction of 8.6%. The laggard sectors
continue to be hospitality, transport, trade, among others.
On an aggregate basis, 50% of the net profits of corporate India are being delivered by just
50 companies.
An analysis by BusinessLine shows that aggregate revenues for 3,827 non-financial listed
companies declined by 7% this quarter compared to a 34% contraction in April-June.
Operating profit margins expanded by four percentage points and net profits of these
companies grew 31% in Q2, after an 80% decline in lockdown disrupted Q1 FY21.
Surprise, surprise? As lockdown began, corporate India spun into action, and on the back
of benign input costs, managed savings in travel and overheads and cut advertising
expenses. As interest rates cut many companies even resorted to cutting debt. Companies
took advantage of the new tax regime and saw a lower outgo. Here is what contributed to
the bottomline buoyancy:
a. Recoveries in sectors like pharmaceuticals, chemicals, financials, IT and cement.
b. Lower operating expenses
c. Lower raw material rates
d. Tax rate reduction offered in September last year.
e. Lower interest rates
f. Renegotiation of rental rates
g. Retrenchment and salary cuts
Just scratching beneath the surface, we find that the quarter’s profits harvest (YoY) was
reaped by:
Building materials with 54.8% improvement where cement has contributed an improvement of 68.38% (Ultratech has jumped by 89.1%, Ambuja Cement by
87.77%, Shree Cement 77.06% Ramco Cement by 40.19% contributing to the larger
absolute rise in net profits) where cement saved costs by moving material by rakes
rather than by road. The Ceramics, Stone and Sanitaryware sector contributed
20.7% with Somany, HSIL, Asian Granito contributing the most. Glass, Laminates,
Wood products have all suffered.
Infrastructure sector contributed by construction infrastructure profit makers
like L&T ( a 238% jump) IRB Infra, Ashoka Buildcon, MBL Infra, Adani Ports. But
most other construction contracting companies struggled to get back on their feet.
Real estate sector has been badly hit too with almost all showing declines over
previous year same quarter
Many of the ‘lockdown’ benefits will get withdrawn like
moratorium, salary cuts will get restored, operations will require
rehiring, building material rates have shot up, festivities will be
over, and so going forward the road to profitability will not drive
through any further cost cutting measures but acceleration of
growth.
Demand needs to come back. Private consumption which is the driver of the economy
(accounting for 58% of the GDP) witnessed a contraction in growth of (-) 11.32% in growth
rates in Q2 FY21 from year ago (6.4%). As per Care Ratings, on the capex side, the
expenditure by the Central Government was relatively slower with 40% of the budgeted
amount being spent compared with 55% last year. For revenue expenditure it was also
slightly lower at 50% compared with 53% last year. Hence there has been prioritization in
expenditures across ministries to keep overall expenditure under check considering that
the revenue flows have been much lower on account of the lockdown which affected tax
collections quite sharply. Significant cut down in spending has also been seen in the
Ministry of Roads, Transport & Highways which spent only 50% of the budgeted
expenditure until September 30 against last year’s 62%. On the revenue side out of the Rs
22.46 trillion of non-debt revenue, only 25% has been garnered as against 40% last year
during the first 6 months. The shortfall of 15% is around Rs 3.36 trillion. Last year too there
was not much movement on disinvestment and that would be another challenge in the
next 5 months. While GST collections have been good in October, a lot depends on the
sustainability of the same.
Author: Pratap Padode is Editor-in-Chief, Construction World, & Founder, FIRST ConstructionCouncil.
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