January 2021: Economic recovery may be on its way

We thought it would be a good time to look at aggregate corporate performance, even though only about a third of the companies in the BSE500 have reported so far, just to gauge how we are recovering from the pandemic in terms of corporate performance. Our sample set is those companies that are non-financials (ie excluding banks, finance, insurance), are part of the BSE500 and have reported results for the quarter ended December 2020 as on date.

The aggregate revenues of the 145 non-financials that have reported so far, are up 0.3% yoy (median: 7.0%), which is not too different from last year same quarter, when revenues for these same companies were down 0.5% yoy (median: 3.8%). One standout among these companies is the heavyweight Reliance Industries whose revenues are impacted by the steep fall in oil prices (Brent crude is down 30% on average over the comparable quarters). So we excluded Reliance from the sample set and found that aggregate revenues for the December quarter are up 5.8% and the median company’s revenues are up 7.1%. This compares with a 0% aggregate revenue growth for the Dec-2019 quarter for the same companies (median: 3.8%). So, what we are seeing is that revenue growth in the Dec-20 quarter is stronger than the same quarter last year, which was a pre-covid period. Admittedly, the Indian economy was going through a tough phase pre-covid and we have discussed some of that in our prior newsletters and we do recognise that the early reporters are typically those with better numbers but the numbers do evoke some surprise from us. The operating profit (Earnings before Interest and Tax) growth for the median company is an even more surprising 23.4%, as corporates seem to have seen expanding operating margins on account of productivity increases.

There are various ways to explain this spurt of growth. One possibility is that we are experiencing some sort of pent up demand which has got pushed through from prior quarters and we will need to see these numbers sustain over the next few quarters to make more definitive conclusions about the same. Yet there are a few factors which are pointing in the positive direction. For one, interest rates are extremely low – RBI’s repo rate which is the rate at which it lends money to banks, is the lowest in history at 4.0%. The RBI under Shaktikanta Das has cut interest rates aggressively – from 6.5% at the beginning of his term in December 2018 to 4.0% now. Interest rates on home loans and other consumer loans have also seen a concomitant fall, potentially boosting demand. Travel and dining out costs have been curtailed for a vast number of people and this could possibly be routed towards other spends, besides overflowing into investing.

One also wonders whether the long-awaited economic recovery could be around the corner. The Indian economy has been through a prolonged slowdown over the last several years and at some point, one can expect an economic recovery on the back of the many reforms undertaken by the government such as GST, the Insolvency and Bankruptcy Code, RERA and others. There are also other positive steps, like the cut in the corporate tax rate, the new Production Linked Incentive Scheme, and the attractive interest subvention for home loans, which can push growth. While these are still early numbers and we will need confirmation from the other companies, as well as over the next few quarters, one can perhaps engender some hope that economic recovery may be on its way.