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MUMBAI : As many as 38% of BSE-listed companies, mostly smaller businesses, struggled to match their pre-covid sales in the three months to September even as results from other companies made for a generally positive third quarter earnings season.

On the face of it, the latest corporate earnings appear to be just what the doctor ordered, with combined net profits of listed companies rising to a record 2.31 trillion. Indian companies posted a strong net profit growth of 62% year-on-year (y-o-y), with an equally stunning 29% sales growth, as the economy recovered quickly, showed a Mint analysis of 3,137 BSE-listed companies.

Even compared to pre-pandemic levels (September quarter of FY20), the combined sales growth was 20%, while profits jumped fourfold. However, only 62% (1,941) actually saw revenue cross the pre-covid level.

For 501 companies, revenue dropped up to 25%, whereas for 695, sales declined more than 25%. This signals lasting pandemic-led gaps opening up in the corporate world, as 53% of these 1,196 companies were smaller businesses that made less than 10 crore in July-September 2019.

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Excluding the banking and finance sector from the sample, profits grew 71% y-o-y and revenue grew 38%. When energy firms were excluded, profits rose 67% and sales 31%. Data for firms in cement, paints, and building materials segments indicates sustained recovery despite high inflation, said Shrikant Chouhan, head of equity research (retail) at Kotak Securities.

A slowdown was also observed in select packaged consumer goods categories and two-wheelers, said Chouhan. “There was some softness in rural demand from August-end and auto sales suffered because of the semiconductor and component shortage," he said.

Meanwhile, firms struggled with rising input costs, as is evident from operating margins. Non-financial companies saw a whopping 37% jump in their total expenditure from the year-ago period, with raw materials making up 54% of total sales, compared to 48% a year ago.

As a result, the operating profit margin of the analyzed companies declined from 20.9% in July-September 2020 to 19.6% in July-September 2021, the analysis showed. Sectors such as infrastructure, aviation, textile and realty felt the squeeze the most. “The margins were mainly impacted because of the sharp rise in materials’ prices, which could not be passed on, and logistics costs to name a few," said Narendra Solanki, head of equity research (fundamental) at Anand Rathi Shares & Stock Brokers. However, lower corporate tax rates helped net profit-to-sales ratio grow nearly 200 basis points during the period.

Meanwhile, the robust figures at an aggregate level were also captured in the sequential change. Revenue grew 15% and profits rose 35%, against a 10% and 14% sequential contraction, respectively, in April-June. The revenue momentum is likely to continue for most businesses and margins should start recovering from the January-March quarter, Solanki said.

While the overall revenue growth fuelled by a subsiding pandemic might bode well for the July-September gross domestic product figures due on Tuesday, the inequities show the economy is still awaiting a more meaningful recovery.

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