Positive quarter

As the economy revives post-Covid, there may be question marks over some segments, but the highly visible members of India Inc are certainly on a rebound. This newspaper’s analysis of latest quarterly numbers from over 920 listed non-finance companies shows their aggregate revenues expanding by 36 per cent in the July-September FY22 quarter compared to last year. This growth can’t be wholly attributed to a favourable base effect either, with sequential revenues demonstrating a good 14 per cent increase. Rising vaccination coverage and lifting of mobility restrictions appear to have powered pent-up demand, with digitisation aiding the informal to formal sector shift, allowing India Inc to cash in. Rising raw material prices have taken some shine out of profits with operating profits growing just 16 per cent. Interest cost savings and lower tax incidence managed to convert this into 24 per cent net profit growth.

A deeper dive into the numbers however reveals a tale of two halves. One, commodity companies benefiting from the global price spiral have been big contributors to the aggregate profit performance, but the same inflationary trends hurt user firms. Excluding commodity firms from the above sample, sales growth, operating profit and net profit growth dip to 24 per cent, 4.8 per cent and 2.4 per cent respectively. For most users of raw materials, returning demand hasn’t translated into pricing power. Market leaders such as HUL and Asian Paints complaining of raw material inflation reveals that the pricing power that most Indian consumer firms took for granted before the pandemic, is no longer a given. While makers of consumer staples faced impaired pricing power, industrial goods makers from cement and auto ancillaries took it on the chin, with significant margin contraction. Thus, while festival demand may keep revenues buoyant in Q3, it is margins that may need watching. Two, while manufacturers presented a divided picture, services put up uniformly strong shows with domestic firms such as telecom as well as export-driven ones like IT doing well. The strong pickup in IT hiring augurs well for demand for consumer goods and retail loans in coming quarters. Three, banks and NBFCs fared better than expected, with asset quality issues showing up only in the case of select players. Private banks and NBFCs reported strong loan growth suggesting a revival in retail risk appetite and managed a sequential moderation in bad loans. But with retail and MSME loans providing much of this boost, concerns remain on whether asset quality issues now lurk in retail loans.

Overall, with the good show on both revenue and profit fronts, India Inc’s Q2 results provide no immediate cause for a correction in the liquidity-fuelled stock market rally. But with the Nifty50 trading at nearly 25 times FY22 earnings, India Inc needs to deliver not just a quarter of good earnings but many more, in order to meet investors’ blue-sky expectations.