Early results show manufacturing companies turning around

by Mahesh Vyas

Financial statements for the quarter ended March 2021 were available for 135 companies as of April 29. This is obviously a very small sample at about 3 per cent of the total companies. But they account for 15.4 per cent of total sales. But this small set of companies provides strong indications of the direction in which the total results would culminate.

Total income of these 135 companies collectively grew by 10.2 per cent. Core business grew better as net sales grew 13.2 per cent while other income and extraordinary income declined by 15 per cent. Expenses grew by a modest 5.4 per cent and so profits could grow by a handsome 50 per cent. Net profit margins of these 135 companies were in excess of 16 per cent. All growth rates used here are compared to a year ago.

Growth in topline and even expenses is much better than in the past two years and profit margin seems to be a record. These upbeat estimates compared to the recent past would be tempered by the larger sample that is expected in the next few weeks. In the meanwhile, a sectoral decomposition seems to be revealing.

First, the increased business levels seen in the acceleration in sales and expenses of the 135 companies are all from the non-financial sector companies and not from the financial sectors. This is different from the story in the preceding four quarters when all the growth came from financial sector companies. In the March 2021 quarter, financial sector companies recorded a negligible 1.7 per cent increase in total income while non-finance companies recorded a growth of 16 per cent. Total expenses of non-finance companies grew by 15 per cent but expenses of finance companies declined by 9 per cent.

Next, while the growth in business is higher in non-finance companies, the growth in profits is much higher in finance companies. Net profits of finance companies more than doubled but that of non-finance companies grew by only 17 per cent. This distinction is not different from the record of the past four quarters.

Among non-finance companies, non-financial services seem to be headed towards delivering an average performance. Their total income grew by 8.5 per cent and net sales grew by 11.5 per cent. Expenses grew by 9.1 per cent and net profits grew by 6 per cent. Among non-financial services companies that have declared results so far, 12 IT companies dominate. Collectively, their sales grew by 6.4 per cent. All the top 5 IT companies have released their results and only one has barely touched double-digit growth in sales. Three of the top 5 listed IT companies recorded losses. Collectively, the 12 IT companies saw their profits shrink by 4.6 per cent in the March 2021 quarter. Profits from other services companies combined with the very low base caused by losses in the March 2020 quarter helped the services sector see a profit growth of 6.1 per cent.

But, aggregate profit of the services sector is predominantly determined by the profits of the large IT companies. Transport, tourism and hospitality sectors continue to suffer and profits of the retail and wholesale trade, communications and miscellaneous are too volatile to make a material impact on the total profit of the services sector. Therefore, the 4.6 per cent fall in profits of IT companies would determine largely the final growth in profits in the services sector. It is likely, therefore, that as the sample of companies increase, the performance of the services sector in terms of both sales and profits would deteriorate.

The manufacturing sector seems to be headed towards a tentative recovery in its topline even as it continues to retain profits growth. In the March 2021 quarter, its total income grew by 27.5 per cent, net sales grew by 35.1 per cent, but total expenses grew by a smaller 23 per cent. As a result, net profits increased by a handsome 50 per cent.

The 56 companies in the sample indicate the raw material pricing advantage manufacturing companies enjoyed in the first three quarters of 2020-21 may have reduced in the March 2021 quarter. Raw material costs increased by 32.7 per cent and purchase of finished goods increased by 19.6 per cent. While both grew at rates lower than the growth in net sales, it is the first time in two years that we see a positive year-on-year growth in raw material expenses. We believe that this growth is susceptible to change as the sample size increases. Wages and salaries grew by 9.9 per cent and interest costs by 3.2 per cent. Other expenses grew by 13.7 per cent.

Manufacturing companies therefore seem to have grown their topline after nearly two years and costs have remained largely under control. As a result, profits have increased well, by over 50 per cent. After adjusting for prior period and extraordinary transactions, net profits of manufacturing companies have more than doubled.

In spite of the robust profit growth of these manufacturing companies, their net fixed assets shrunk by 8.6 per cent as of March 2021 compared to March 2020. Except chemicals and machinery, every major manufacturing industry in this limited sample has shown a fall in net fixed assets. The apparent lack of interest in growing assets under the coming conditions perhaps, makes sense. And, while the early evidence of a topline turnaround in the manufacturing sector’s performance is encouraging, we need to see this evidence gather strength as more results are announced.

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