India Inc gets an easy ride

by Mahesh Vyas

Topline growth played a critically important role in growth in profits of Indian listed companies in the June 2022 quarter. Total income of these companies in the June 2022 quarter was 40.1 per cent higher than it was in the June 2021 quarter. This is an impressive growth rate by any standard. In fact, it is among the highest quarterly y-o-y growth rates seen in the recent history of the corporate sector.

The only statistical exception to this superlative topline growth of the June 2022 quarter is the 42.1 per cent record growth in the June 2021 quarter. But, that was a recovery from a highly shrunken base of June 2020 which was hit by the severe lockdown.

The June 2022 quarter has no advantage of a low base like the June 2021 quarter had. This makes the growth in total income during the quarter truly extraordinary. This growth in total income is a continuation of exceptional growth rates pencilled in the recent past during the period of the pandemic.

Two years after the onset of the pandemic-induced lockdown of June 2020, the total income of listed companies was 50 per cent higher than what it was a year before the lockdown. Clearly, listed companies have come out of the pandemic with flying colours. We also know that their profits soared to levels that were never seen before. But, profit is not the discussion in this analysis. Our focus is on total income and its largest component, net sales which is a measure of the total business conducted by companies. Business expanded during the pandemic period at a rate that enterprises had not seen in a very long time.

A recovery of total income beyond pre-pandemic levels is only a point estimate. It compares what may be called as a post pandemic quarter, June 2022, with a pre-pandemic quarter, June 2019. What is more impressive is what we find when we compare the y-o-y growth of each of the nine quarters since (and including) the June 2020 quarter with the preceding nine quarters.

The average quarterly y-o-y growth during the nine quarters since (and including) the June 2020 quarter is 12.6 per cent. To be more specific, the geometric mean of the y-o-y growth of the nine quarters from June 2020 through June 2022 was 12.6 per cent. The geometric mean in the nine quarters before the June 2020 quarter was much lower at 7.2 per cent. The nine quarters before that yielded 4.4 per cent. And, the one before that delivered an even lower growth of 2.2 per cent.

Evidently, if we look beyond the quarter-to-quarter growth rates over a slightly longer time horizon, then first, growth has been accelerating and second the acceleration was not curtailed by the dreadful pandemic.

But, is this a chimera caused by high inflation in recent times? Has the inflation in prices bloated sales without an increase in volumes? To answer this question, we shift the analysis to non-finance companies. We include non-finance service companies also in our analysis because their demand is also impacted by inflation. We also shift the analysis to net sales instead of total income as the latter includes income from financial services delivered by non-finance companies.

CMIE systematically transforms the aggregate estimates of nominal net sales of the non-finance companies into real sales by deflating the nominal growth estimates by an appropriate set of price indices.

The real, inflation-adjusted, growth in net sales of non-finance companies was a whopping 26.7 per cent. The real growth in net sales of manufacturing companies was an equally impressive 20 per cent. Except for a base-correction in the June 2021 quarter, listed non-finance and manufacturing companies have never seen such a high growth in volumes. High inflation has clearly not dampened demand for goods and services delivered by the listed companies.

Reverting back to a comparison of growth in the entire pandemic period since June 2020 to earlier periods, we see that inflation adjusted growth was higher at 9.4 per cent during the pandemic period. The earlier nine-quarter periods saw quarterly y-o-y growth rates between 3 and 6 per cent.

The going has been pretty good for the listed companies of India. Business has expanded even in the face of the pandemic and high inflation. Furthermore, its pace of growth has accelerated.

The going was good enough that companies did not have to invest into new capacities. Better utilisation of existing assets helped fuel this growth. For three consecutive years since 2019-20, growth in sales has been fuelled by growth in better asset utilisation and the contribution of growth in assets has been negative.

Further, the growth in profits has been fuelled by growth in sales more than growth in profitability. In each of the last three quarters ended June 2022, the contribution of growth in profitability to growth in profits has been negative. The entire growth in profits is fuelled by growth in sales. And, sales as we have seen are fuelled by better utilisation of assets. As a result, the corporate sector has seen a steady improvement in returns on capital invested during the pandemic and inflationary times.

Corporates seem to have required to focus less on improving profitability and much lesser on raising and deploying fresh capital. This was like a free ride during very difficult times for the economy.