+
How companies managed to boost profitability post-lockdown
ECONOMY & POLICY

How companies managed to boost profitability post-lockdown

Will profits growth of over 30% in Q2 sustain?
Large companies are cornering bigger market shares. Their turnovers are rising at the cost of other declining turnovers of smaller and medium-sized firms. Consolidation is likely as either the companies will sell out or clients will agree to pay a higher price and reach out to the bigger brand and more trusted company in virtually every sector.

The economy has shrunk by 7.5% in the second quarter against a 23.9% contraction in the first quarter, signalling that business reopening has had a positive impact. Now RBI’sGovernor is projecting a contraction of 7.5% for FY 2021 against previous estimates of acontraction of 9.5%.

The construction sector has sprung back from the first quarter’s debacle of 50.3% to a contraction of 8.6%. The laggard sectors continue to be hospitality, transport, trade, among others.

On an aggregate basis, 50% of the net profits of corporate India are being delivered by just 50 companies.

An analysis by BusinessLine shows that aggregate revenues for 3,827 non-financial listed companies declined by 7% this quarter compared to a 34% contraction in April-June. Operating profit margins expanded by four percentage points and net profits of these companies grew 31% in Q2, after an 80% decline in lockdown disrupted Q1 FY21.

Surprise, surprise? As lockdown began, corporate India spun into action, and on the back of benign input costs, managed savings in travel and overheads and cut advertising expenses. As interest rates cut many companies even resorted to cutting debt. Companies took advantage of the new tax regime and saw a lower outgo. Here is what contributed to the bottomline buoyancy:

a. Recoveries in sectors like pharmaceuticals, chemicals, financials, IT and cement.
b. Lower operating expenses
c. Lower raw material rates
d. Tax rate reduction offered in September last year.
e. Lower interest rates
f. Renegotiation of rental rates
g. Retrenchment and salary cuts

Just scratching beneath the surface, we find that the quarter’s profits harvest (YoY) was reaped by:

  • Building materials with 54.8% improvement where cement has contributed an improvement of 68.38% (Ultratech has jumped by 89.1%, Ambuja Cement by 87.77%, Shree Cement 77.06% Ramco Cement by 40.19% contributing to the larger absolute rise in net profits) where cement saved costs by moving material by rakes rather than by road. The Ceramics, Stone and Sanitaryware sector contributed 20.7% with Somany, HSIL, Asian Granito contributing the most. Glass, Laminates, Wood products have all suffered.
  • Infrastructure sector contributed by construction infrastructure profit makers like L&T ( a 238% jump) IRB Infra, Ashoka Buildcon, MBL Infra, Adani Ports. But most other construction contracting companies struggled to get back on their feet.
  • Real estate sector has been badly hit too with almost all showing declines over previous year same quarter
  • Many of the ‘lockdown’ benefits will get withdrawn like moratorium, salary cuts will get restored, operations will require rehiring, building material rates have shot up, festivities will be over, and so going forward the road to profitability will not drive through any further cost cutting measures but acceleration of growth.

    Demand needs to come back. Private consumption which is the driver of the economy (accounting for 58% of the GDP) witnessed a contraction in growth of (-) 11.32% in growth rates in Q2 FY21 from year ago (6.4%). As per Care Ratings, on the capex side, the expenditure by the Central Government was relatively slower with 40% of the budgeted amount being spent compared with 55% last year. For revenue expenditure it was also slightly lower at 50% compared with 53% last year. Hence there has been prioritization in expenditures across ministries to keep overall expenditure under check considering that the revenue flows have been much lower on account of the lockdown which affected tax collections quite sharply. Significant cut down in spending has also been seen in the Ministry of Roads, Transport & Highways which spent only 50% of the budgeted expenditure until September 30 against last year’s 62%. On the revenue side out of the Rs 22.46 trillion of non-debt revenue, only 25% has been garnered as against 40% last year during the first 6 months. The shortfall of 15% is around Rs 3.36 trillion. Last year too there was not much movement on disinvestment and that would be another challenge in the next 5 months. While GST collections have been good in October, a lot depends on the sustainability of the same.

    Author: Pratap Padode is Editor-in-Chief, Construction World, & Founder, FIRST ConstructionCouncil.

    Also read: Why India’s GDP is leaking!

    Also read: We are in the final stages of mining reforms: Pralhad Joshi


    Will profits growth of over 30% in Q2 sustain? Large companies are cornering bigger market shares. Their turnovers are rising at the cost of other declining turnovers of smaller and medium-sized firms. Consolidation is likely as either the companies will sell out or clients will agree to pay a higher price and reach out to the bigger brand and more trusted company in virtually every sector. The economy has shrunk by 7.5% in the second quarter against a 23.9% contraction in the first quarter, signalling that business reopening has had a positive impact. Now RBI’sGovernor is projecting a contraction of 7.5% for FY 2021 against previous estimates of acontraction of 9.5%. The construction sector has sprung back from the first quarter’s debacle of 50.3% to a contraction of 8.6%. The laggard sectors continue to be hospitality, transport, trade, among others. On an aggregate basis, 50% of the net profits of corporate India are being delivered by just 50 companies. An analysis by BusinessLine shows that aggregate revenues for 3,827 non-financial listed companies declined by 7% this quarter compared to a 34% contraction in April-June. Operating profit margins expanded by four percentage points and net profits of these companies grew 31% in Q2, after an 80% decline in lockdown disrupted Q1 FY21. Surprise, surprise? As lockdown began, corporate India spun into action, and on the back of benign input costs, managed savings in travel and overheads and cut advertising expenses. As interest rates cut many companies even resorted to cutting debt. Companies took advantage of the new tax regime and saw a lower outgo. Here is what contributed to the bottomline buoyancy: a. Recoveries in sectors like pharmaceuticals, chemicals, financials, IT and cement. b. Lower operating expenses c. Lower raw material rates d. Tax rate reduction offered in September last year. e. Lower interest rates f. Renegotiation of rental rates g. Retrenchment and salary cuts Just scratching beneath the surface, we find that the quarter’s profits harvest (YoY) was reaped by: Building materials with 54.8% improvement where cement has contributed an improvement of 68.38% (Ultratech has jumped by 89.1%, Ambuja Cement by 87.77%, Shree Cement 77.06% Ramco Cement by 40.19% contributing to the larger absolute rise in net profits) where cement saved costs by moving material by rakes rather than by road. The Ceramics, Stone and Sanitaryware sector contributed 20.7% with Somany, HSIL, Asian Granito contributing the most. Glass, Laminates, Wood products have all suffered. Infrastructure sector contributed by construction infrastructure profit makers like L&T ( a 238% jump) IRB Infra, Ashoka Buildcon, MBL Infra, Adani Ports. But most other construction contracting companies struggled to get back on their feet. Real estate sector has been badly hit too with almost all showing declines over previous year same quarter Many of the ‘lockdown’ benefits will get withdrawn like moratorium, salary cuts will get restored, operations will require rehiring, building material rates have shot up, festivities will be over, and so going forward the road to profitability will not drive through any further cost cutting measures but acceleration of growth. Demand needs to come back. Private consumption which is the driver of the economy (accounting for 58% of the GDP) witnessed a contraction in growth of (-) 11.32% in growth rates in Q2 FY21 from year ago (6.4%). As per Care Ratings, on the capex side, the expenditure by the Central Government was relatively slower with 40% of the budgeted amount being spent compared with 55% last year. For revenue expenditure it was also slightly lower at 50% compared with 53% last year. Hence there has been prioritization in expenditures across ministries to keep overall expenditure under check considering that the revenue flows have been much lower on account of the lockdown which affected tax collections quite sharply. Significant cut down in spending has also been seen in the Ministry of Roads, Transport & Highways which spent only 50% of the budgeted expenditure until September 30 against last year’s 62%. On the revenue side out of the Rs 22.46 trillion of non-debt revenue, only 25% has been garnered as against 40% last year during the first 6 months. The shortfall of 15% is around Rs 3.36 trillion. Last year too there was not much movement on disinvestment and that would be another challenge in the next 5 months. While GST collections have been good in October, a lot depends on the sustainability of the same. Author: Pratap Padode is Editor-in-Chief, Construction World, & Founder, FIRST ConstructionCouncil. Also read: Why India’s GDP is leaking! Also read: We are in the final stages of mining reforms: Pralhad Joshi

    Next Story
    Infrastructure Urban

    REC honoured with ‘Best Design Thinking Award’ at DNA Awards 2025

    REC, a Maharatna NBFC under the Ministry of Power, has received the ‘Best Design Thinking Award’ at the 5th Distinguished NBFC Awards (DNA Awards) hosted by Banking Frontiers.The award acknowledges REC’s digital initiatives in Retail Bonds, highlighting the company’s efforts to leverage technology and design thinking to improve customer experience and service delivery.Jitendra Srivastava, CMD, REC, congratulated the finance team for their commitment and contribution towards driving innovation. Harsh Baweja, Director (Finance), along with senior officials, joined in celebrating the reco..

    Next Story
    Infrastructure Urban

    How India’s Logistics Sector Becoming Smarter, Faster, and Fairer

    India’s logistics system, once criticized for being slow and fragmented, is now showing signs of a genuine turnaround. Policy reforms, new infrastructure, and rapid adoption of technology are changing the way goods move across the country. Officials argue the impact will be felt not just in lower costs, but in faster operations and more equitable opportunities for small businesses.Smarter: Digital Innovation Taking HoldThe biggest shift has been digital. Artificial Intelligence (AI), Machine Learning (ML), IoT and block chain are no longer buzzwords, they are now being used on the ground. Fl..

    Next Story
    Infrastructure Urban

    Hindustan Zinc Charts Multi-metal Future as Cornerstone of 2x Growth Strategy

    Hindustan Zinc, a Vedanta Group company and the world’s largest integrated zinc producer, has announced a bold transformation agenda – Hindustan Zinc 2.0 – to evolve from a zinc-and-silver leader into a diversified, multi-metal enterprise powering India’s future growth.Addressing shareholders at the company’s 59th Annual General Meeting, Chairperson Priya Agarwal Hebbar said, “Hindustan Zinc is moving beyond its zinc and silver legacy to become a multi-metal, future-ready enterprise. As demand for critical minerals grows across clean energy, digital infrastructure, and national sec..

    Advertisement

    Subscribe to Our Newsletter

    Get daily newsletters around different themes from Construction world.

    STAY CONNECTED

    Advertisement

    Advertisement

    Advertisement

    Talk to us?