Margins-led profits growth

by Mahesh Vyas

Listed companies continue to make record profits. Financial statements for the quarter ended March 2021 are available for 1,481 companies. These account for about a third of all the 4,400 companies that usually release their financial statements in a quarter. But, they account for a substantial 97 per cent of the combined sales of all listed companies. So, they represent companies that have a larger bearing on the overall performance of all listed companies.

These 1,481 companies collectively made a net profit of Rs.1.8 trillion which is nearly 15 per cent higher than the record profits of the previous quarter. In our analysis on May 28 we had stated that net profits of listed companies could touch Rs.1.8 trillion in the March 2021 quarter. That expectation has been met already by just one-third of the companies. Aggregate profits are likely to continue to increase as more companies release their results. But, profits may not climb far beyond the current levels because most of the remaining companies are unlikely to add much to the total.

Profit have increased entirely because of an increase in profit margins. This is true although March 2021 was the first quarter when the topline was distinctly higher than its year-ago level after six quarters. Total income of the 1,481 listed companies in the March 2021 quarter was 14.5 per cent higher than it was a year ago. Yet, this barely contributed 0.2 per cent to the increase in profits. Growth in profits came from the huge jump in profit margin.

A year ago, in the March 2020 quarter, net profit margin over total income had fallen to nearly its lowest level at 0.13 per cent. In March 2021, the margin at 10 per cent was near its zenith. This huge gap between the margin in the base quarter and in the current quarter is the biggest source of the increase in profits compared to a year ago. Net profits in the quarter ended March 2021 were over 300 per cent higher than they were a year ago.

Margins have increased in spite of the rebound in commodity prices. The wholesale price index for minerals in the quarter ended March 2021 for example was 13.2 per cent higher than it was a year ago. This was the highest increase in mineral prices since mid-2019. The WPI for crude petroleum and natural gas was up 7.3 per cent y-o-y in the same period, which the highest since early 2019.

These price increases reflect in the financial statements of listed companies as well. Expenses on raw materials and purchase of finished goods in the quarter ended March 2021 were higher by 15.9 per cent compared to a year ago expenses. This growth in input costs was higher than the 14.5 per cent topline growth. Yet, companies managed to clock the over300 per cent growth in net profits because other costs were controlled well. Salaries and wages grew by 10.5 per cent and power and fuel by 11 per cent. In fact, operating expenses other than raw materials and wages shrunk by 0.8 per cent. This is what helped companies grow their profits.

Financial statements of non-finance companies are better suited to a typical analysis of the sources of profits from by breaking up the costs. Finance companies do not incur raw material costs like non-finance companies do.

Of the total 1,481 companies for which financial statements of the March 2021 quarter were available, 1,190 were non-finance companies. Their net sales growth y-o-y in the March 2021 quarter was 20 per cent. Raw material costs grew by a slightly lower 18.3 per cent in the same period. Yet, total operating expenses grew by a little less than 11 per cent. This is because purchase of finished goods grew by 11 per cent, wages grew by 7.5 per cent and other expenses did not grow at all. The significantly lower growth in purchase of finished goods compared to net sales is somewhat exceptional. Purchase of finished goods account for 15-20 per cent of total operational costs. The effects of the second Covid wave had probably set in and companies were unable to offload inventories. The non-financial sector saw an increase in their inventories equal to 2.6 per cent of their cost of sales.

Raw materials account for 35-40 per cent of the total operating expenses of non-finance companies. It is by far, the largest variable expense. While this grew in lockstep as the topline expanded robustly for the first time after six quarters, companies managed to control other costs, which could largely be the relatively fixed costs.

While the extraordinary profits reaped by the corporate sector during the quarters of September and December 2020 were based on lower input costs, the even higher profits of the March 2021 quarter emanates from more than just an input cost advantage. The March 2021 quarter is the first since 2017 when growth in total income was faster than the growth in all major costs raw material & purchase of finished goods, salaries & wages, and other expenses. It is this all-round cost control that helped corporate sector raise margins significantly in the quarter. The net profit margin of non-finance companies at 10.6 per cent is at a record high.

The apparent control of fixed costs could yield long term benefits to companies. It accounts for about 20 per cent of total costs of non-finance companies. Even a small cost saving here could provide a structural boost to the bottom line.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
6.5 +0.1
Consumer Sentiments Index
Base September-December 2015
78.9 +0.7
Consumer Expectations Index
Base September-December 2015
77.3 +0.4
Current Economic Conditions Index
Base September-December 2015
81.5 +1.1
Quarterly CapEx Aggregates
(Rs.trillion) Dec 21 Mar 22 Jun 22 Sep 22
New projects 4.03 8.48 4.39 3.27
Completed projects 2.77 1.32 1.20 1.14
Stalled projects 0.08 0.43 0.27 0.06
Revived projects 1.98 0.32 0.29 0.07
Implementation stalled projects 0.66 0.09 0.29 0.03
Updated on: 06 Oct 2022 8:28PM
Quarterly Financials of Listed Companies
(% change) Sep 21 Dec 21 Mar 22 Jun 22
All listed Companies
 Income 27.5 23.4 20.8 40.3
 Expenses 26.7 21.3 19.9 41.7
 Net profit 55.7 35.4 30.6 20.4
 PAT margin (%) 9.6 9.0 8.8 7.3
 Count of Cos. 4,705 4,754 4,656 4,572
Non-financial Companies
 Income 35.7 29.2 24.8 50.3
 Expenses 36.1 28.8 25.7 53.4
 Net profit 58.0 19.2 9.8 7.8
 PAT margin (%) 8.7 7.5 7.6 5.9
 Net fixed assets 4.9 2.0
 Current assets 11.1 15.2
 Current liabilities 0.9 11.9
 Borrowings 12.2 3.6
 Reserves & surplus 12.6 11.2
 Count of Cos. 3,398 3,443 3,382 3,354
Numbers are net of P&E
Updated on: 06 Oct 2022 8:28PM
Annual Financials of All Companies
(% change) FY20 FY21 FY22
All Companies
 Income 0.6 -1.0 25.9
 Expenses 0.4 -3.2 24.4
 Net profit -6.2 73.6 62.9
 PAT margin (%) 2.0 4.3 8.6
 Assets 9.0 9.9 9.6
 Net worth 4.8 12.0 14.2
 RONW (%) 3.3 6.8 12.4
 Count of Cos. 32,743 31,040 6,560
Non-financial Companies
 Income -1.1 -2.0 32.4
 Expenses -0.9 -3.9 31.9
 Net profit -22.5 61.2 59.8
 PAT margin (%) 2.2 3.9 7.4
 Net fixed assets 11.4 2.3 1.9
 Net worth 2.1 10.3 14.7
 RONW (%) 4.6 7.6 13.8
 Debt / Equity (times) 1.2 1.0 0.7
 Interest cover (times) 1.9 2.4 4.7
 Net working capital cycle (days) 82 87 54
 Count of Cos. 25,923 24,408 4,771
Numbers are net of P&E
Updated on: 05 Oct 2022 12:29PM