India Inc growth. Strong demand, low base boost India Inc’s earnings growth in Q4

A year after the country went into a complete lockdown, India Inc reported a robust rebound in demand. Based on the results declared so far by 391 companies (excluding banks and financials), India Inc saw a 20 per cent year-on-year (y-o-y) increase in the topline. This was aided by a combination of a subdued base last year, demand recovery, and higher realisations.

The low base of last year, coupled with continuing costs savings, helped boost net profits (adjusted after extraordinary items) by a whopping 62 per cent y-o-y; margins of many manufacturers reflected the heat of rising commodity prices.

Volumes, realisations up

The demand recovery seen in this quarter was a play of both volumes and an uptick in realisation. FMCG players continued to flourish thanks to strong volumes. Companies such as Hindustan Unilever (HUL), Marico, and Dabur reported an increase in revenues in the range of 25-35 per cent (y-o-y). Auto manufacturers, too, benefited from strong volumes. Maruti Suzuki, for instance, recorded a 28 per cent jump in volumes, which led to a 33.6 per cent growth in its revenue in the March 2021 quarter.

Cement and steel manufacturers gained from an uptick in realisations, given the buoyancy in construction and infrastructure segments. UltraTech Cement saw a 28 per cent growth in sale volumes. The company’s revenues got a further boost from a 4 per cent y-o-y rise in (average) realisations, across regions. Riding on the commodity upcycle, Tata Steel also reported a 29 per cent jump in its average realisations, following which its consolidated revenues grew by 39 per cent y-o-y.

A double-edged sword

In the last couple of quarters, India Inc has had a tight rein on costs, which helped bolster earnings, despite the weak demand. In the March 2021 quarter, too, corporates kept their costs in check. Of the 391 corporates, 268 manufacturing-based companies reported operating margins of 22 per cent in March 2021, up from 13.6 per cent in the March 2020 quarter, largely driven by commodity-based companies. Excluding commodity-based companies, the EBTDA margins improved from 17 per cent in March 2020 to 19 per cent in March 2021 on an aggregate.

Though the aggregate operating margins expanded, the margins of many manufacturers were impacted by the spike in input costs, with the rising commodity prices acting as a double-edged sword. FMCG players such as Marico witnessed a 300 basis points drop in EBITDA margins owing to the surge in cost of raw materials such as copra, despite having a tight rein on other expenses and ad spend. The sales uptick in Maruti was also offset by the sharp increase in metal prices.

The CRB Commodity Index (by Thomson Reuters) — an indicator of core commodity prices —was up 37 per cent as on March 31, 2021, compared to March 31, 2020 ( point-to point). The effect of the rising commodity price inflation is also visible in the sequential drop in margins of manufacturing-based companies, that fell from 23 per cent in December 2020 quarter to 22 per cent in March 2021 quarter.

The overall operating profits of India Inc were up 68 per cent, in Q4 2021, compared to corresponding period last year. While interest expenses of corporates dropped by 12 per y-o-y, taxes grew by 30 per cent y-o-y, leading to an overall 62 per cent surge in net profits.

Tepid outlook

The pain from rising input prices is yet to be fully felt for India Inc. The CRB Commodity Index for instance has inched up by another 6 per cent from end-March 2021 already. Besides, the second wave of Covid infections and the ensuing partial lockdowns in several parts of the country, have dampened the outlook for India Inc’s earnings growth. Managements have factored in the looming uncertainty in their guidance growth numbers. Larsen and Toubro, for instance, guided for a modest revenue growth of 11-15 per cent y-o-y only in FY22, despite witnessing a decline of 7 per cent y-o-y in its consolidated revenues in FY21. Vehicle makers have temporarily shut production and are on wait-and-watch mode. Tata Steel also expects its their domestic demand to be impacted by the re-imposition of mobility restrictions amidst the resurgence of Covid-19 infection, coupled with the tapering policy support. However, the company’s international operations are expected to hold the fort.