The nascent uptick in corporate performance in the January-March quarter has gathered momentum in the first quarter of the current fiscal. Many more companies were upgraded during the quarter even as an early sample shows a marked improvement on both revenues as well as profitability.
The creditworthiness of Indian companies as well as their profitability have improved sharply in the April-June quarter of 2021, indicating that the corporate sector could be heading for a sustainable revival over the rest of the year.
Data from seven credit rating agencies shows these firms upgraded 771 companies in the April-June quarter and downgraded 370, giving a healthy credit ratio of 2.08 for the three-month period.
This gauge, which measures the ratio of upgrades to downgrades was at 0.36 in the first quarter of the previous financial year when these ratings agencies upgraded 241 companies and downgraded 662 others. A ratio below 1.00 indicates that more companies are being downgraded and, therefore, points to the poor health of the corporate sector.
The ratio was at 1.77 in the January-March 2021 quarter. Thus, there is an improvement in the health of the Indian corporate sector both YoY and QoQ. In fact, the rate of upgrades rose at the fastest pace since last year, when the pandemic broke out in India.
The upbeat tidings coming from a study by Prime Acuité Credit Ratings Migration Database of ratings data from seven agencies that include CARE, CRISIL, India Ratings, Infomerics and Brickwork, is borne out by an analysis carried out by ET Intelligence Group.
An early sample of 240 quarterly results analysed by the group showed a steep rise in both revenues as well as profits, albeit on a truncated base – India was in the midst of the world’s most stringent lockdown in the April-June quarter of last year.
This year, despite local lockdowns in many states, including in India’s richest state Maharashtra, because of the second wave of the Covid-19 pandemic, the net sales of the 240-company sample rise sharply by 34.1 per cent, while net profit zoomed 67.8 per cent.
This is the second consecutive quarter of double-digit sales growth, while the bottom line has been strong for the fourth quarter in a row. However, it must be borne in mind that the dramatic increase in the sales and profit figures is largely a result of the low base effect.
In a sign that the going wasn’t that easy, higher commodity prices and increased personnel costs drove operating margins down by 290 basis points (bps; 100 bps = 1 percentage point).
The improving performance of the Indian corporate sector, as shown by both the ratings upgrades as well as the quarterly figures, is the result of a combination of a number of positive factors such as increased government spending, timely disbursal of loans, the relief measures announced by Finance Minister Nirmala Sitharaman, a proactive effort by company managements to cut overhead costs and effective restructuring of loans by banks and other lenders, industry executives said.
The return of migrant labour to their workplaces and the initiatives by several businesses to vaccinate their workforce free of cost has helped accelerate this trend.
They expect the trend to gather momentum in the current and coming quarters as the pace of vaccination picks up and India inches closer to its target of vaccinating its entire adult population of 900 million by the end of the year.
“After FY21 ended with a solid 15 per cent EPS growth for the Nifty, we expected FY22 to commence with a bang and expect a further build-up over the remainder of FY22," a report by leading brokerage firm Motilal Oswal Financial Services said.
And as the fear of contracting Covid recedes, contact-intensive sectors such as hospitality, airlines, restaurants, etc., that have taken a big hit during the pandemic, will slowly begin to revive.
For the moment, though the uptick in upgrades is led by power, real estate, pharmaceuticals and chemicals companies.
“Quarter-end updates from several corporates indicate a healthy revival in June '21 after a subdued April and May,” the Motilal Oswal report added.
However, as mentioned above, the operating margin fell 290 bps – to 23 per cent on the back of a 100 per cent increase in raw material costs and a 67.7 per cent rise in people costs compared to the previous corresponding quarter.
The rising commodity cycle, which was partially responsible for the improved performance of the companies, is also partly to blame for the rising costs.
The combined share of raw materials and personnel costs rose to an 11-quarter high of 43 per cent of top line in the first quarter of the current fiscal. This is unlikely to fall significantly in the coming quarters. So, companies may have to factor this new normal into their projections.
But policy makers and corporate executives will take heart from both the improving creditworthiness as well as rising profitability of the Indian corporate sector, which could set the stage for a sharp recovery in the coming quarters.