What happened to the superlative profits?

by Mahesh Vyas

Indian companies made superlative profits during 2020-21 and 2021-22. This is now well established. It was first seen in the abridged financial statements of listed companies. Now, we see it in the complete audited financial statements of listed and unlisted companies. What is interesting is what the companies did with the profits they earned. Broadly, there are four avenues for deployment distribute the profits as dividends, invest into new capacities, invest into financial instruments of other enterprises and, deploy the resources into building inventories or into other current assets.

The composition of the distribution of profits into these avenues tells us what companies are thinking about the future. It tells us about management decisions on resource allocation. Broadly, companies may decide to distribute the profits to shareholders or re-invest it into the business. If owners of companies take a greater proportion of the profits out as dividends then they believe that they have better use for the money than the business they own has.

We analyse the financial statements of 3,299 non-finance companies. These include 2,509 listed companies and the remaining 790 are unlisted enterprises. In terms of count, this is a small sample because the larger sample of non-financial companies in CMIE’s Prowess database is over 25,000. But, these 3,299 companies accounted for over 60 per cent of the total sales of all companies. They are therefore quite representative.

These 3,299 companies made Rs.6.7 trillion of net profit after tax (PAT) in 2021-22. This is much higher than the Rs.5.6 trillion PAT generated by the larger set of 24,347 companies in 2020-21, which in turn is much higher than the previous peak of Rs.4 trillion in 2018-19. These are the superlative profits reaped by companies in recent years.

The relation between profits and dividends is interesting. An increase in profits leads to an increase in dividends but, a fall in profits usually does not lead to a fall in dividends. In the 32 years since 1990-91, the aggregate profits of non-finance companies declined in eight years but dividends declined only once in 2008-09. In the past 8 years aggregate profits declined in 3 years but aggregate dividends never declined.

Interestingly, the superlative profits of the past two years were deployed increasingly internally by companies and not paid out as dividends. In 2020-21, 48.6 per cent of the net profits were deployed internally. This was the highest proportion of profits retained in 9 years. In 2021-22, 60.4 per cent of the profits were deployed internally. This was the highest in 11 years, since 2010-11.

Prima facie, this suggests that enterprise owners believe that they have better use for the money earned in the company than outside. The logical next question is what did they do with the money?

What jumps out most from the data is what they did not do with the money. They did not deploy it into creating new capacities. Net fixed assets of non-finance companies grew by only 2.3 per cent in 2020-21 and then by only 2.1 per cent in 2021-22. Further, investments into plant and machinery grew by only 0.97 per cent in 2020-21 and 0.21 per cent in 2021-22. Assets grew more because of furniture and other fixed assets and because of the growth in intangible assets. These grew by 6-7 per cent and 4-5 per cent, respectively. Even gross fixed assets growth was down to 6-7 per cent. These are values in nominal terms. In real, inflation-adjusted, terms assets of non-finance companies have shrunk.

Interestingly, while companies have refrained from investing into creating new capacities, they were enthusiastic regarding investing into the equity of other companies. Investment into equity shares increased by 17.4 per cent. Investment into debt instruments increased by 28.5 per cent.

Investment by non-finance companies in financial instruments has generally been growing at a faster rate than their investments into fixed assets. As a result, the share of investments in total assets of companies has grown from single digits in the 1990s to 10-12 per cent in the 2000s and then to around 14 per cent in more recent years. In 2021-22, this share shot up to 21 per cent in good measure because of the fall in the share of other assets.

This sharp increase in investments into financial assets and the simultaneous negligence of investments into fixed assets indicates that companies are confident of growth in business but do not see a need to invest into fixed assets. This could be either because of continued excess capacity in spite of the runaway growth in sales seen in last two years or because of a price advantage. Interim financial statements of listed companies for the quarter ended June 2022 suggested that companies recorded growth in both volumes and prices. The growth juggernaut therefore has continued into 2022-23 without any significant increase in fixed assets.

Slack capacities and price advantage are not sustainable sources of growth. Corporates will have to return to growing their fixed assets to fuel further growth. It seems that time is overdue. Corporates are flush with resources because of the recent profits and their balance sheets are highly de-leveraged. The debt-equity ratio was down to 0.99 in 2020-21. It has declined further in 2021-22. There are no constraints to investing into new capacities. What is at play therefore is pure business strategy.

The financial statements of listed companies for the quarter ended September 2022 would include the balance sheet. This would provide us a peep into what the companies are doing in 2022-23 on investing into fresh capacities. It will reveal the collective wisdom of the Indian corporate sector on the further deployment of its superlative profits.

CMIE STATISTICS
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