The combined profit of listed Indian firms as a percentage of the GDP rose 2.6 per cent in the fiscal year ended March 2021. India Inc’s net profit to GDP ratio touched a four year peak, an indicator of the rebound of the economy, especially sectors like manufacturing and metals, which were affected by the national lockdown imposed in 2020. India has experienced the second wave of the pandemic, and as there are signs of a plateauing of the curve across some states, India Inc seems to have been resilient.
The net profit to GDP ratio of listed companies had hit a low of several years in the fiscal year ended March 2020, touching 11.6 per cent, reports suggest. In the last quarter of fiscal year 2021, the net profits of top 200 firms in India have grown over two-folds on the back of solid earnings.
According to an analysis* of 475 firms listed on exchanges (barring banks, financials and oil & gas) net profit and sales were at a six-year high in the fourth quarter of fiscal year ended March 2021. While the net sales of these companies went up by 25.71 per cent year-on-year in Q42021, in the same quarter of the previous fiscal year, net sales had fallen by 8.64 per cent. Net profit rose over 117 per cent y-o-y in the March quarter of 2021 as compared to a decline of over 28 per cent in the same quarter of 2020.
Another analysis based on results declared by 391 firms till the first half of May 2021 has shown that Indian companies saw a 20 per cent y-o-y increase in revenues. The analysis doesn’t factor in banks and financials.
However, a fuller picture is expected to emerge after the remaining listed companies declare their results. The market regulator, Securities and Exchange Board of India (SEBI) has extended the deadline for companies to announce financial results for fiscal 2021 to June 30.
What is the reason for the profits of Indian companies in spite of the second wave?
The sectors that have put up a good performance have largely been cyclical, thereby adding to the combined profit of listed firms. Take the rally by the metals sector, for instance, which has contributed significantly to the corporate earnings. Metal prices have been on the ascendant ever since the pandemic last year. Data shows that Nifty Metal Index has shown more than 250 per cent gains following the low of March 2020, and has outperformed all other sectoral indices ever since. The other sectors that have seen earnings recovery include IT, cement and pharma.
The other reasons for the robust earnings have been the low base of the last year and recovery in demand. According to news reports, the demand recovery for the March quarter was attributed to strong volumes and an increase in realisations. The rise in realisations was seen by steel and cement manufacturing firms. Strong savings in costs during the past few quarters also helped beef up earnings. Data suggests that out of 391 corporates that have announced their earnings, 268 manufacturing-based firms showed operating margins of 22 per cent for March 2021, an increase from 13.6 per cent in the same quarter of the previous financial year. This increase in operating margins may be attributed to commodity-based firms. The combined operating profits of Indian corporates went up 68 per cent for the quarter ended March 2021.
Commodity price rise
While the rise in commodity prices has come to the aid of some industries like metals, the same has negatively impacted sectors like automobiles, FMCG or consumer durables. Some of the industries and companies have managed to offset the impact of rising commodity prices with an increase in the price of their products. Fast-moving electrical goods (FMEG) firms for instance saw a decline of 2-5 per cent for the second half of FY21 in their margins because of an increase in commodity prices, including steel, aluminium, plastics and copper.
According to Jefferies analysts, the first wave saw Nifty earnings estimates for FY21 and FY22 slashed by 33 and 21 pc respectively till September 2020. Later, earnings estimates saw an upgrade to 12 per cent/9 per cent, taking the overall impact to a degrade of 24 per cent and 14 per cent respectively for FY21 and FY22. This may not see any change and the cut is likely to extend into the June-August 2021 quarter as well, the analysts note.
A key factor that will decide the earnings momentum will be the tapering of the second wave and the pace of vaccinations. The absence of a national lockdown and the emphasis on localised lockdowns has also made a difference to the earnings of many companies, especially manufacturing-based firms. The role of vaccinations and the subsiding of the second wave will be key to the continued strong results of India Inc.
India Inc has posted strong results in spite of the second wave of the pandemic, on the back of a recovery in demand, the lower base of the last year and the rally of commodities such as metals. The pace of vaccinations and the end of the second wave will further strengthen corporate earnings for the future quarters.