Macro corporate trends for Q2 FY21
Out of the 4,250 listed companies that regularly announce their quarterly results, nearly 3,200 companies have already announced results for the Sep-20 quarter. That is nearly 75% in numbers and 96% in market cap. In short, the markets are substantially covered. Let us look at the top line first. Overall sales for these 3200 companies are down by 6.4% on a yoy basis, which indicates that volumes are gradually getting back to pre-COVID levels. On a sequential basis, the sales growth was 27%, but that is misleading as Jun-20 was especially a weak COVID quarter.
Interestingly, the gross profit of these 3,200 companies is up 11.2% yoy despite a fall in sales revenues. Across the board, you can see lower raw material costs and discipline in other expenses. The interest burden for the quarter is up by only 1.5%, which is indicative of lower cost of credit in the midst of abundant liquidity. The tax costs are up 24% yoy, but that must be taken with a pinch of salt. Most companies had booked huge deferred tax credits in the Sep-19 quarter when they shifted to the flat tax formula. Hence this tax growth may not really sustain. What really takes the cake is that the net profit is up 153% on a yoy basis as the operational benefits have been transmitted to the bottom line. In fact, on a sequential basis net profits have grown 5-fold in the Sep-20 quarter.
Which sectors drove the quarterly numbers higher?
The sectoral picture is a lot more interesting. Let us first look at some key sectors that performed well in the quarter. The agri sector has done well across the board with 21% growth in sales and tripling of profits on yoy basis. Bumper Kharif harvest and a largely immune rural India boosted demand. It was a great quarter for the heavyweight banking sector. Across PSU banks and private banks, the revenues were up by 10.4% while the net profits were up nearly 7-fold. Apart from the big private banks holding growth, even PSU banks have seen a bottoming of the revenue cycle. Lower provisioning in the Sep-20 quarter was largely responsible for a surge in profits. Capital goods and chemicals had negative growth in sales but positive growth in profits.
If agri and banks were the big stories, there were two other stories that almost went unnoticed. Infrastructure stocks saw sales 17% lower but profits are up 145% as costs were managed more efficiently. The real icing was insurance with revenues up 7-fold and net profits more than doubling. COVID eloquently underlined the importance of insurance. IT continued its steady growth with revenues growing 4% and profits growing 9.5%. In a nutshell, revenues are creeping back to pre-COVID levels but the real story is about companies across sectors tweaking their cost structures to boost profits.
Which sectors put pressure on quarterly numbers?
Let us start with two sectors that have been the darling of the markets through the pandemic; healthcare and FMCG. The FMCG sector saw a 3.3% hike in revenues but the profits were down by 5%. While rural was giving the boost to FMCG, they were taking a hit on margins in an increasingly competitive market. Healthcare has also been a similar ball game. In this case, the revenues were up 9.5% but profits were down 7%. Overall the API players have done well but that is yet to reflect in traditional pharma or in hospitals. But COVID did give these sectors a top line boost.
Then there were some obvious suspects. Jewellery companies saw top line down 70% and net profit down 46% as demand almost dried up and supply chains got disrupted. With construction activity still tepid, the electrical goods makers saw 15% fall in revenues and 29% fall in profits on weak OEM demand. Media companies took deep cuts with revenues down 37% and profits down 69%. Subscription demand has remained stable but ad revenues are drying up. OTT platforms are not making their task any easier. In the case of retailing, the pandemic has pushed the entire sector into losses, which rubs into their 45% lower revenues. Hospitality and tourism do not require much elaboration.
Some key takeaways for the quarter
The message is that while the traditional suspects are still putting pressure, there is an effort to boost profits through aggressive cost cuts. To be fair, Sep-20 has provided the momentum after the disastrous Jun-20 quarter. The next few quarters could really give us a picture of whether the corporate revenues and profits are able to permanently sustain above pre-COVID levels.