Home / Economy / The challenge of inflation in business revival, in charts

“What defines us is how well we rise after falling," goes a famous quote from the 2002 film Maid in Manhattan. Indian firms exemplified this by scripting yet another revival story after the pandemic plunge. Low interest costs, market consolidation and tax savings lifted over 80% of India’s top listed companies out of the woods in the year that ended on 31 March, shows a Mint analysis of earnings declared in recent weeks. For around 67%, profits had crossed pre-covid levels in 2020-21 itself.

The analysis is based on figures for 234 Nifty 500 firms that have declared FY22 results so far. It shows that the dent to corporate financials in the early months of the pandemic was massive but brief. A gradual demand recovery and a tight leash on costs have revved up earnings since then. Some lasting impact in how India Inc. manages costs and productivity and is adopting technology and digitization is also aiding financial performance, said Dhananjay Sinha, managing director at JM Financial Institutional Securities.

However, the recovery has been uneven, with some sectors still struggling to make meaningful progress, such as hospitality, media, telecom, and automobiles. The beleaguered auto sector has seen multiple headwinds and profits are down 17% from pre-covid levels. Contact-intensive sectors are improving gradually, and wholesale and retail trade have recovered well, Sinha said.

Meanwhile, after a resurgent FY22, challenges are flaring up again in the form of expensive raw materials as well as demand risks due to high inflation across sectors.

Major headwinds

While massive cost-cutting cushioned profits, a spike in inflation, crude oil prices and raw material costs could slow this trajectory. In FY22, operating margins of the sample dropped 140 basis points (bps), while net profit growth slowed from 61% to 52%.

Rampant inflation and material shortages have led to build-up of inventory levels, and companies are again taking more time to collect due payments after the FY21 recovery, said Anil Sarin, chief investment officer at Centrum PMS.

Dislocations caused by the Russia-Ukraine war and China’s zero-covid policy have significantly increased days working capital (DWC) in several sectors. As the global situation improves, “there should be a marked reduction in DWC, leading to better cash flows for businesses across the world", he added. Days working capital refers to the number of days a company needs to convert its working capital into revenue, and a low DWC indicates better efficiency.

Widespread pain

Inflation is hurting businesses and pressure is clearly emerging across sectors with wholesale inflation averaging 14.3% over the past six months. Raw material costs as a share of revenues rose by nearly 22 percentage points (pps) for the consumer durables sector over the last eight quarters, 13 pps for the auto segment, and 11 pps for chemicals.

Not only has the passthrough of input cost inflation to consumers been partial, companies are also facing the risk of demand itself being hit by high inflation in general, Sinha said.

The rising cost pressure is hurting especially companies with less pricing power. Companies in the consumer durable space saw a sequential drop of 50 basis points in their operating margins, while the hospitality segment was reeling under a contraction of 480 bps.

Experts fear an imminent slowdown. Concerted inflation-control measures taken by the central bank and the government will start reflecting only with a lag, Sinha added.

Yet, rewarding

Despite all odds, many firms have managed to consistently generate value for shareholders. Around 55% of the firms in the sample generated better return on equity (ROE) than in 2018-19, while 46% improved their return on capital employed (ROCE). For 24 firms, the ROE rose each year in this period. “Market share consolidation has ensured pricing power and asset utilization, leading to high return ratios," said Sarin.

Return ratios have recovered over the past two years after a decline in the eight preceding years. Among other factors, Sinha attributes this to various post-pandemic stimulus measures and strong revival in commodity prices, which aided a significant rebound in sales growth and earnings, especially for the metals sector.

Meanwhile, margin pressure is expected to remain for now and could dent profitability again.

(This is the second of a three-part series about corporate India’s recovery from the pandemic and the path ahead. The first part covered companies’ stock market performance.)


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