2 min read.Updated: 15 Feb 2021, 09:37 PM ISTLivemint
We have seen a sharp rise in corporate profits on modestly better sales. Thank cost squeezes and efficiency gains for this showing. Sales expansion, however, is the real challenge ahead
Black ink is in corporate demand. A Mint assessment of nearly 2,500 listed companies has revealed that their net profit in the third quarter of 2020-21 expanded by 72%, year-on-year. This is the fastest pace in at least 25 quarters and about twice the pep of the preceding quarter ended 30 September. The review left out some sectors like hydrocarbons and financial services, as they follow a different revenue model, but its findings offer us a fairly representative view of how our relatively large businesses have fared as they emerged from the covid lockdown of this fiscal year’s first quarter. Both sales and profits had crashed during those three grim months. The added-up bottom line figures of our sample bounced back in the ‘unlock’ quarter thereafter, even as their topline stayed flat. The latest quarter’s results make for a mix of jubilation and relief. Not only is the profit curve sharply inclined, their sales have shown a revival too. They are up 7% from the same period of 2019-20, thanks partly to festive spending and a spring-back of repressed demand.
Some of India Inc’s good showing can be attributed to the so-called base effect. Indian business performance had been in a slump even before covid struck, with quarterly sales and profits having shrunk over most of 2019-20 as our economy flagged. As the growth achieved was on a shrunken base, these firms are yet to achieve a full recovery. Still, given the adversities they had to endure, any break into positive territory is cause for optimism that growth impulses will pick up further over the quarters ahead. While future demand will depend on several factors, not all of which can be projected from current trends, our companies clearly look better placed to extract more money from every buck of revenue than they were pre-covid. For this, credit the cost-control measures most of them took during the lockdown (and after). It was an emergency of a truly rare kind. Our economy suffered both a supply and demand shock. With no production possible for weeks on end, costs of the variable kind would have fallen anyway. But, with no end in sight to the crisis back then, their evaporation of revenues and resultant urgency to compress outflows drew attention to dispensable overheads and other fixed costs like never before. As the virus raged, businesses rushed to retrench staff, slash salaries, shave office expenses and enhance operational efficiency, among other things. The firms that lightened up without any loss in productive capacity have emerged leaner from that exercise. Whether they have gotten much meaner, with a superior ‘tooth-to-tail ratio’ that will let them attain enlarged turnovers on a smaller cost base, though, is yet to be tested.
Among the challenges that manufacturers face is an uptrend in commodity prices. Even as they watch their input costs, they might find the demand scenario within the markets they address harder to forecast. To be sure, India’s latest budget has upped expectations of a broad return to form. Its infrastructure outlay, for example, should convert state expenditure into increased incomes because of its multiplier effect. Swift project execution holds the key to this hope. If a robust economic rebound exhausts idle capacity and elicits fresh private investment, we would generate the kind of high-paid jobs needed for demand buoyancy that looks good even on a 10-year scale. This sequence may or may not work out, but either way, India Inc had better be prepared.