India Inc continued to report robust numbers for the quarter ended September 2021, on the back of a reopening economy and rollout of vaccinations. However, the continued surge in commodity prices represents a significant countervailing trend.

Going by the numbers (923 listed companies excluding BFSI), India Inc registered 36 per cent growth in sales, 16 per cent rise in EBITDA (earnings before interest, taxes and depreciation) and 24 per cent rise in adjusted net profit in the September 2021 quarter versus last year’s Covid-impacted September quarter (y-o-y growth). Quarter-on-quarter growth from the June to September 2021 quarter, too, was impressive.

However, as a percentage of sales, raw material cost rose to 35.5 per cent in the September 2021 quarter from 31.5 per cent, a year ago. Largely due to this, EBITDA margins came down (see table). However, helped by efficiency-related cost savings and operating leverage from scale up in operations, aggregate EBITDA went up 16 per cent.

A fall in interest expense – from 20 per cent of operating profit to 15.3 per cent – thanks to lower leverage, boosted the bottomline of listed companies. Their aggregate adjusted net profit rose 24 per cent y-o-y in the September 2021 quarter despite higher tax expense.

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Commodity players lead

Excluding commodity (metal and energy) companies, y-o-y growth in EBITDA and adjusted net profit comes down to 4.8 per cent and 2.4 per cent, respectively for the latest September quarter.

Higher realisations driven by the surge in commodity prices over the past year have bumped up the revenues and profits of commodity players. Thomson Reuter’s CRB Commodity Index — an indicator of key global commodity prices — gained 36 per cent between September-end 2020 and 2021. JSW Steel, for instance, reported a 69 per cent jump in revenue and multiplied its EBITDA 2.4 times in the September 2021 quarter from year ago. Growth was helped by better export and domestic realisations, higher share of value-added steel products (60 per cent vs. 51 per cent a year ago) and strong export demand for coated products.

Many face cost pressure

With a sharp rise in prices of commodities such as palm and crude oil, and packaging material, and significantly higher freight rates impacting costs, FMCG players took to product price hikes. This helped HUL maintain its EBITDA margin at 25 per cent, while for Marico, it dipped from 19.6 per cent a year ago to 17.5 per cent. Given the longer wait periods for car buyers, demand has not been the constraining factor for car manufacturers. Shortage of semiconductor chips which dented capacity utilisation, and an increase in input costs (steel and aluminium) hit sales and profits. For instance, while Maruti Suzuki’s revenue rose 9 per cent to ₹19,298 crore, operating profit dived 92 per cent to ₹99 crore in the latest quarter compared to the year-ago period. Operating profit margins shrank to 0.5 per cent from 6.6 per cent.

IT stands tall

With greater focus on digitisation, IT companies delivered a solid performance. Despite salary hikes, thanks to strong revenue growth, employee cost as a percentage of sales remained unchanged at 54 per cent. Software companies have been the beneficiaries of higher IT spends driven by greater outsourcing of IT and other operations by businesses as part of cost optimisation in the post-Covid world.

What next

For leading IT players, greater focus on digitisation and revenue visibility thanks to large deal wins are big positives. FMCG companies may continue to see near-term pressure on margins and will have to keep an eye on how demand pans out, especially with inflationary pressures. The recent price hikes by steel companies are expected to help protect their margins from input cost inflation.

The next few months are important as one needs to see whether the improvement in corporate performance sustains, particularly given the fact that last year’s low base effect is wearing out.

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