Q2: India Inc gets margin boost on falling input cost, lower expenses

Margins could normalise from Q3, but could still be higher than in the pre-Covid era
Aggressive cost-cutting and sharp declines in commodity and energy prices helped India Inc post record operating margins in the second quarter of financial year 2020-21 (Q2FY21), despite falling sales and revenues, because of the pandemic.

The combined operating expenses (excluding interest, depreciation and taxes) of 490 listed companies in Business Standard’s sample were down 12.4 per cent year-on-year (YoY) in the quarter, as against a 5.6 per cent YoY decline in net sales, and 2.9 per cent YoY decline in revenues.

This resulted in a jump of 780 basis points (bps) in Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins to a record 28.6 per cent of revenues in Q2, from 20.8 per cent a year ago. One basis point is one-hundredth of a per cent.

Gains from the collapse in global commodity and energy prices were most visible in the results of manufacturing companies.

The combined raw material costs for such firms in the sample were down 10.8 per cent YoY in Q2, while power and fuel costs were down 12 per cent and employee expenses down 2.1 per cent YoY.

Companies were proactive in cutting overheads such as advertising, promotion, and travel. These other expenses reduced by 12.8 per cent YoY in Q2. However, the firms’ net sales were down 8.3 per cent YoY in Q2, indicating a contraction in per unit manufacturing cost.

Companies in process industries and energy-intensive products — such as cement, chemicals and tyres — were also beneficiaries and reported high double-digit growth in earnings despite flat or low single-digit growth in volumes.

For instance, Ultratech Cement’s net profit doubled in Q2 on a YoY basis with just a 9 per cent YoY growth in net sales. Similarly, tyre maker Ceat’s net profit quadrupled in Q2 with just a 16 per cent YoY growth in net sales. The gains were muted for manufacturers in sectors such as automobiles and consumer durables because of a decline in volumes.

However, analysts say margins and profitability in these sectors would have been worse if not for the decline in input costs and lower overheads.

“In Q2, companies benefitted from raw material and inputs acquired at rock bottom prices in April and May. Margins will normalise in next two quarters as most commodity prices, including metals, oil and gas, have moved up sharply in the last two months,” says G Chokkalingam, founder and MD of Equinomics Research & Advisory Services.

Analysts say corporate margins were also aided by a change in product mix, especially in the consumer goods sector, as companies tried to cope with disruption in supply chain because of the lockdown.

“As raw materials and parts supply got disrupted due to the lockdown, many companies curtailed their production and focussed on pricier but high margin products. This pushed margins, especially in consumer goods sector,” says Shailendra Kumar, CIO of Narnolia Securities.

Margins could normalise from Q3, but could still be higher than in the pre-Covid era. “Corporate margins have structurally shifted upwards by 200-300 bps due to aggressive cut in overheads and discretionary expenses by India Inc,” says Kumar.

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