Earnings surprise

Even the eternally over-optimistic analyst community seems to have been surprised by India Inc’s good earnings show for the second quarter of FY21. A BusinessLine analysis shows aggregate revenues for 3,827 non-financial listed companies declining 7 per cent this quarter compared to a 34 per cent contraction in April-June. Operating profit margins expanded by 4 percentage points on the back of benign input costs, savings in travel and overheads and lower discretionary costs such as advertising. As the Reserve Bank of India’s rate cuts began to trickle down, the companies reported a material improvement in interest cover (from 2.6 times to 5 times) and pared debt. Firms that opted for the new tax regime saw lower outgo. All this contributed to the net profits of these companies growing 31 per cent in Q2, after an 80 per cent decline in lockdown disrupted Q1 FY21.

While brokerages are treating this as a renewed opportunity to peg up their Nifty growth estimates, the enthusiasm appears premature on three counts. One, pent-up demand and stronger rural offtake seem to have propped up sales for sectors such as FMCGs, two-wheelers and utilities. If the rural surge is simply the result of reverse migration or consecutive good monsoons bolstering farm incomes, the growth may soon revert to mean. Consumption of homes, appliances and vehicles in India has always been driven by the creamy layer and there’s evidence of consumer confidence in this segment taking a sizeable hit from pay cuts and job loss fears. Two, while Covid seems to have changed some consumer habits for good — triggering a shift to digital payments, e-commerce and personal transport — the middle-income consumer’s frugal mood is clear from her downtrading to cheaper FMCGs, preferring pre-owned vehicles and going slow on non-essentials. In sectors such as automobiles, there’s also indication of channel-stuffing by manufacturers in anticipation of festive demand which may or may not translate into retail sales. Three, while corporate results and high-frequency economic indicators suggest a quick normalisation of industrial activity, the revival in services — two-thirds of GDP — remains patchy at best. Numbers from banks this quarter hide the true picture on non-performing assets, retailers are reporting fewer footfalls; airlines and hospitality continue to bleed on government-imposed restrictions. The live possibility of a second wave of Covid infections with a return to lockdowns also threatens the incipient revival.

Given these imponderables, it may be best to wait and watch India Inc’s results for another quarter before assuming that the revival is V-shaped. Extrapolating the good show by listed companies to the entire economy would also be a mistake. Profits of listed companies, after all, amount to less than 5 per cent of GDP and micro enterprises chip in with a sizeable share of both output and employment.