Tentative recovery

Headline numbers from 2,700 listed firms for the quarter ended March 2016 hint at a turnaround in the corporate sector. Aggregate sales growth, at 3.5 per cent year-on-year, has returned to positive territory after shrinking 3- 7 per cent in each of the last four quarters. This suggests that companies have fought off recessionary trends and are witnessing an improving demand environment. The recent rebound in commodity prices has restored some pricing power to firms and lifted sales too, though this has curtailed raw material savings. Excluding banks and financial firms, the profit picture looks healthier with total operating profits expanding by 8 per cent and sustainable net profits (excluding one-off items) increasing 10.4 per cent over last year. The corporate profit revival is getting more broad-based as well. Until December 2015, it was automobiles, FMCGs, private banks and retailers — urban consumer-focussed sectors — that did much of the heavy lifting on growth. But in the March quarter, higher sales of agrochemicals, fertilisers and two-wheelers suggest a tentative pickup in rural demand. Strong numbers from large infrastructure players, cement makers and power utilities show that the Centre’s efforts at de-bottlenecking stalled projects is paying off.

While all this is good news, it isn’t going to be easy for corporate profits to push higher from here. For one, these profit numbers would show a 20 per cent decline with the inclusion of banks, which — thanks to sharply higher provisioning for bad loans — have struggled through one of their worst performances in recent memory. While analysts are hoping that the worst is over after record losses this quarter, the size of restructured loan books and slow progress on recoveries suggest that a turnaround is some way off. Two, wage inflation is a looming challenge for corporate India too, with a 10 per cent rise in employee costs despite sluggish top-lines. The key to a durable recovery at India Inc now lies in supportive commodity prices and a decisive turnaround in banking. Apart from carrying a hefty 30 per cent weight in the bellwether indices, banks supply the critical ingredient needed to fuel the rest of the economy — credit. Therefore, nursing the sector back to health through restructuring and recapitalisation of leading public sector banks should be a policy priority, if the recent green shoots are to flourish.

India Inc’s March quarter performance seems to have convinced the stock markets that corporate earnings have turned the corner. The S&P BSE Sensex has added over 1,500 points in the last ten days reacting to bellwether firms beating Street expectations. A few foreign brokerages have also upgraded their Sensex targets and predicted a 16-17 per cent Sensex earnings growth for FY17. But given that such optimistic projections have been proved wrong a number of times in the last couple of years, it is best not to take the recovery for granted.

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