How India Inc benefited from the pandemic

The movement of the stock market since the beginning of the pandemic has been quite confounding to most of us. Even as the real economy contracted sharply in the June quarter of 2020, stocks rallied sharply. This year, though the second wave of the coronavirus wreaked havoc with the economy and lives, stock market indices kept hitting life-time highs.

Stock prices are expected to reflect the future earning prospects of companies and tend to exhibit exuberance well before the actual numbers turn rosy. The optimism of market participants is often misplaced and that tends to send prices crashing eventually. But, this time, there appears to be some method in the madness.

Market participants have been quite prescient in expecting a robust financial report card for India Inc. for FY21 and Indian corporates have delivered on these elevated expectations in style. Contrary to the view that listed companies would have suffered greatly due to demand destruction during the lockdown last year, listed companies have made hay in FY21, at the aggregate earnings level.

In fact, earnings growth last fiscal was probably the best in the last few decades with aggregate net profits of listed companies almost doubling in FY21, when compared to FY20. Besides the improvement in profitability, the balance sheets of larger players have also become healthier with lower loans and higher cash balances. So, unless the third wave gets too out of hand, listed companies appear to be in fine fettle to meet improved demand, once the pandemic abates.

What’s behind the resilience?

Many market experts have been making the point that severe economic disruptions such as the demonetisation, GST rollout and the ongoing pandemic have made listed companies gain at the expense of smaller businesses, especially in the unorganised sector. The companies that list on the stock market are the largest and most profitable in each industry. They have deep pockets to make quick adjustments to alter their supply channels according to changing customer needs during the pandemic. In fact, as smaller businesses remained shut during the lockdown, their business may have flowed to the larger players.

This is being reflected in the numbers. Revenue of 2,430 actively traded stocks on the BSE, excluding banks and finance companies, declined 7.46 per cent in FY21 when compared to FY20. But net profit of stocks in this universe was higher by 98 per cent. If oil refineries are excluded, growth in profits is 75 per cent.

What is of interest is that of the top 100 companies in terms of revenue, only seven companies recorded losses last fiscal year. The list of loss-making companies included the usual suspects — Bharti Airtel and Vodafone, Tata Motors, BHEL and MRPL.

Commodity producers have gained the most from the reduction in global production and shutting down of capacities, which resulted in prices moving higher. Large oil marketing companies witnessed outsized inventory gains. Companies also went on a cost-control spree and the large reduction in interest costs, thanks to easy liquidity and lower rates, helped further.

Balance sheet improves

Companies seem to have used the lower demand and greater liquidity and fiscal support during the pandemic to strengthen their balance sheets. An SBI Ecowrap analysis of the FY21 results of 1,000 companies showed that in sectors such as steel, fertilisers, retail, consumer durables, etc., loan funds have declined in the range of 13-67 per cent. Refineries, steel, fertilisers, mining and mineral products and textiles alone have reduced debt by more than ₹1.50 lakh crore in FY21.

Last fiscal was also marked by record low capital expenditure by listed entities, which could have also helped free up funds. Growth in fixed assets and capital work-in-progress was at the lowest in the last 10 years, at 2.06 per cent in FY21. This is not surprising. Given the demand uncertainty, companies would have gone slow with their ongoing capex or commencing new capital projects. Private capex has been growing at a very low rate since FY16 and the pandemic seems to have impacted it further. But if demand conditions improve, companies may not have too much of a difficulty in increasing capex.

Companies are also holding more cash in hand now. Cash and cash equivalents of listed companies has registered a growth of 13 per cent in FY21. In contrast, cash in hand of listed entities contracted 21 per cent in FY17 and 1.7 per cent in FY18, when demonetisation and GST rollout impacted listed companies. These numbers show that the pandemic has not really hurt listed companies to the extent that the other two events did.

On the contrary, it may have brought about changes in the manner of doing business, which will help long-term growth. For instance, many consumer facing businesses have taken to digital route to sell their products, which has expanded their reach considerably, given the proliferation of smartphone usage. Overheads such as electricity, staff welfare, travel, rent and so on have been pruned considerably with employees working from home. Marketing and selling expenses have also reduced due to digital advertising costing far less. Many of these reductions in expenses are likely to stay.

What it means for banks

Reducing leverage of larger borrowers is however not good for banks. With need for loans from larger companies going down during the pandemic, banks’ exposure to better rated large borrowers is declining. With the monetary policy measures incentivising lending to the micro, small and medium enterprises, the RBI’s Financial Stability Report points out that stress is beginning to build in the MSME loan book with loan moratoriums creating incentives for the ‘zombification’ of some firms.

Pain points however remain in corporate loan book of banks. This is mainly due to heavily indebted corporates with large legacy loans, unable to service them during the pandemic. According to the RBI’s FSR, though the GNPA ratio for large borrowers declined across all categories of banks in the second half of FY21, there was a sequential uptick in the growth of loans in the SMA-1 category. Loans in the SMA-2 category recorded a reduction, mainly due to a large portion of these loans slipping into NPAs following lifting of the asset classification freeze.

That said, the ongoing pandemic seems to have made the fundamentally sound and well-run corporates pause and re-draw their strategic growth plans to face the post-pandemic world with cleaner balance sheets and healthier reserves.

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