When the going gets tough, the tough gets going. This maxim seems to apply to India Inc, which seems to have eked out surprisingly good earnings numbers in the July-September 2020 results season.

An analysis of 3,827 listed companies that have reported their numbers (excluding banks and financials) shows a strong sequential improvement in the top-line (up 37 per cent) and net profits (up 470 per cent), thanks to companies slowly resuming operations post the lockdown.

On a year-on-year basis, the top-line fell by 6.7 per cent, indicating that demand is yet to reach pre-Covid levels.

Net profit saw an improvement of 31 per cent year-on-year.


What were the trends underlying this revival? Here’s a deeper dive into India Inc’s results scorecard.

Demand yet to recover fully

India Inc had been grappling with weak demand owing to economic slowdown even before Covid made its appearance and the nationwide lockdowns were imposed. After witnessing muted growth for many quarters, aggregate revenues of listed companies (excluding banks and finance companies) contracted in the September 2019 quarter by 2.9 per cent. (All numbers mentioned in this article are year-on-year figures unless otherwise stated.)

But the business-disrupting lockdowns in the March and June 2020 quarters further worsened the contraction, with revenues of these companies slumping by 6.8 per cent and 34 per cent, respectively.

With most consumer-facing businesses resuming operations in July-August 2020, the top-line of listed companies saw a sequential improvement of 37 per cent in the September quarter. But when compared with the corresponding quarter last year, the aggregate revenues were still lower by 6.7 per cent. If one remembers that the September 2019 quarter was in itself a muted one, this suggests that aggregate demand is yet to recover to pre-Covid levels. Take, for instance, Ashok Leyland — the heavy vehicle manufacturer’s sales more than doubled sequentially in the September quarter, owing to pent-up demand during the lockdown. However, the company’s net sales at ₹ 3,835 crore during the quarter were down 24 per cent over the corresponding quarter last year — which was already a weak period with revenues down over 40 per cent.

Other vehicle manufacturers such as Tata Motors, Eicher Motors and Bajaj Auto, too, saw sequential surge in sales, but their revenues are still below than that in last year’s September quarter. Primary sales of vehicle manufacturers to dealers have seen a steady month-on-month improvement in October as well, and whether this translates into equally strong retail sales in the final quarter of the year remains to be seen.

Similarly, companies in the hospitality and aviation industries, which saw a complete washout on revenues in the June 2020 quarter, posted healthy sequential growth in the September 2020 quarter. The revenues of Interglobe Aviation, for instance, tripled sequentially.

But when compared with the September quarter last year, the company’s revenues were down 66 per cent to ₹2,741 crore. For these sectors, the easing of government restrictions on occupancy and capacity may hold the key to a more durable revival.


Cost cuts boost margins

While revenue growth was no great shakes, a standout feature of India Inc’s results for the quarter was the significant cost savings, which saw manufacturing companies deliver a a notable spike in their operating margins.

Of the 3,827 companies that reported their September quarter numbers, 2,537 were manufacturing-based.

The operating margins of these fiirms ncreased to 19 per cent in the September 2020 quarter, compared with 16 per cent in June 2020.

Not only were direct costs lower on account of weak production volumes, but the raw material costs also dropped as a percentage of sales to 54 per cent in the September 2020 quarter (from 57 per cent in September 2019). Importantly, these operating profit margins were also much higher than those in the September quarter of 2019 at 15 per cent.

The CRB Commodity Index (by Thomson Reuters) — an indicator of core commodity prices — dropped over 15 per cent in the September 2020 quarter compared with the same period last year. This was a major contributor to India Inc’s savings on input costs. Raw material, and power and fuel costs were down 13 per cent and 11 per cent yo-y, respectively.

For cement manufacturers, who were already reaping the benefits of consolidation, lower input prices gave a further fillip to operating profits.

UltraTech Cement, for instance, reported a 30 per cent spike in its EBITDA per tonne, owing to a 7 per cent and 12 per cent drop in power and fuel, and employee expenses, respectively, in the September quarter.

Companies also continued their trend of pruning employee-related costs. Employee costs dropped by 7 per cent and 2 per cent, respectively, in the June and September quarters.

The employee cost cut was much higher for companies operating in the retail segment. V-Mart, Aravind Fashions and Trent saw their employee costs drop over 20 per cent in the September quarter.

Besides the savings on account of work-from-home, pay-cuts and furloughs, companies are also adopting other schemes to bring down employee costs. SAIL, earlier this month, announced one such scheme, where about 72,000 employees of the company will be able to opt for lower working hours, in return for proportionate foregoing of their salary benefits.

Companies in the FMCG and telecom sectors brought down their advertisement expenses by 3 per cent and 7 per cent respectively.

In services, select sectors such as IT defied profit declines to reap margin gains from sharp reductions in business travel and overheads, managing profit growth.

Paring debt

The cost savings led to a strong spike of 42 per cent in the aggregate operating profits of corporates (excluding banks and financials). While operating profits improved, net profits received an added fillip from a 7.5 per cent drop in interest costs, as the series of rate cuts over the past year finally began to trickle down to borrowers.

Consequently, the aggregate interest cover ratio for India Inc almost doubled to five times, from 2.6 times in the June quarter. A cover of six times is deemed comfortable.

For a few companies, faster transmission of rate cuts in short-term debt helped in substantial savings in borrowing costs for working capital. ONGC, for instance, witnessed a 40 per cent (y-o-y) drop in its finance costs in the September quarter. This was due to both debt reduction (to the tune of ₹1,800 crore) and the company opting for short-term CPs (commercial papers) with lower interest rates.

With businesses shut during the lockdown, most companies experienced cash crunch. However, India Inc seems to have utilised this time to follow up on receivables, and shifted its focus to cash collections.

This, coupled with strict working capital measures, led to a significant reduction in debt for companies in the September quarter. Shree Cement’s consolidated debt dropped to ₹1,477 crore in the September quarter, from ₹ 1,639 crore in March 2020.

Surprisingly, much of the debt reduction in India Inc came in stressed sectors such as infrastructure, metals and mining, oil refineries and telecom. A recent report from Credit Suisse has highlighted that while stressed companies acquired more debt in the June 2020 quarter (₹23.8-lakh crore in aggregate), the debt levels for such companies plunged to ₹15-lakh crore — down 37 per cent sequentially in the September quarter.

Credit Suisse has classified corporates as stressed companies if they either incurred losses in the last couple of quarters, or their interest coverage ratio was lower than 1.

For a few companies, however, despite debt reductions, accounting adjustments acted as a bummer. Larsen & Toubro, for instance, reduced its debt by ₹5,600 crore in the September quarter to ₹1.46-lakh crore, owing to the cash surplus from its recent sale of its electrical and automation division. However, its finance costs inched up by 12 per cent during the quarter, owing to cessation of interest capitalisation on the Hyderabad Metro project. Tata Steel, too, reduced its debt by ₹8,200 crore in the September quarter, owing to buoyancy in domestic steel prices. However, the company’s interest costs were up 4 per cent on account of forex fluctuations — nearly half of the company’s debt is in foreign currency.

Tax concessions help

While debt reduction, coupled with moratorium on loans opted by certain companies, helped ease the pain on cash flows, tax outgo saw a 31 per cent spike during the quarter. However, with many corporates opting for lower tax rates, the tax incidence for India Inc (tax expense as a percentage of profits before tax) dropped to 24 per cent in the September quarter, compared with 44 per cent in September last year.

In September 2019, the Finance Minister had announced a lower tax rate of 22 per cent (plus surcharge) for corporates which wished to forego most of their deductions. Companies that gradually opted for the lower tax rates had to reverse their existing MAT (minimum alternative tax) credits and other deferred tax assets (created on the basis of exemptions, that are now disallowed for the lower tax regime). Owing to these reversals — and lower profits — the tax incidence surged to over 100 per cent in the March and June 2020 quarters.

Turnaround stories

Overall, it was a combination of lower input costs, cost rationalisation measures, and declines in interest and tax outgo that helped India Inc manage a 39 per cent y-o-y net profit growth in the September 2020.

Thanks to these tailwinds, the quarter gave rise to several turnaround stories, too. Out of the 1,381 companies that reported losses in the September quarter last year, 460 returned to profits this year.

These include companies such as Jindal Steel and SAIL that gained on the back of healthy steel prices in the country. Banks such as Axis Bank, IDBI Bank, YES Bank and IDFC First Bank, too, saw their profits turnaround in the September 2020 quarter.

For the banking and financial services sector, however, it would pay not to read too much into the recent numbers. For most banks, profits were optically higher on account of lower provisioning costs, while reported gross non-performing assets (GNPA) numbers saw a a slight moderation.

But much of this is owing to the Supreme Court order that mandated an asset classification standstill during the moratorium period. Once the moratorium is lifted, a likely surge in slippages in the coming quarters may temper profit growth.