Extended lockdowns weigh heavy on corporate India

PBT margins contract to multi-year lows, says ICRA

In the backdrop of the prolonged nationwide lockdown, an ICRA analysis of financial results of 489 companies (excluding financial sector entities), has shown a year-on-year and sequential contraction in revenues, with aggregate revenues contracting by 31.1% y-o-y in the first quarter of FY2021.

During the same period, the PBT margin contracted by 498 bps on a y-o-y basis, and by 70 bps sequentially to multi-quarter lows of 3.6%. “Restrictions on manufacturing, industrial, construction and consumption activities for the major part of Q1 FY2021 due to imposition of nationwide lockdown primarily hurt the financial performance of the Indian corporate sector,” Shamsher Dewan, VP, Corporate Sector Ratings, ICRA, said.

“The contraction in revenues was visible across most major sectors, but it was sharpest in consumer-oriented sectors where revenues contracted to nearly half of the year-ago levels, given customer wariness to effect purchases, especially large-ticket ones, because of the uncertain economic environment and erosion of purchasing power,” he said.

Sectors like airlines, hotels, retail, automotive and consumer durables, which primarily comprise discretionary purchases, were significantly impacted, while other consumer-oriented sectors like FMCG and consumer foods were relatively less impacted given the essential nature of these purchases, he added.

As per the analysis, stress was visible across major sectors, with the exception of select sectors like IT, telecom, sugar and pharmaceuticals.

Commodity-linked sectors contracted by 34% on a y-o-y basis with almost all the major commodity sectors, including oil and gas, metals and mining, iron and steel and cement, reporting revenue contraction on the back of tepid realisations due to benign commodity prices and subdued volumes.

Industrial and infrastructure-oriented sectors also contributed to the slowdown with 29% and 38% y-o-y de-growth respectively during the quarter, given the restrictions on activity, ICRA said.

Negligible revenues for the major part of the quarter, which impacted the absorption of fixed overheads, and lower realization in commodity sectors (especially metals and oil and gas), weighed on the profitability of India Inc., with PBT margins contracting to multi-year lows, it said.

“This was despite benefit of subdued raw material prices and favourable rupee movement in select sectors like IT. Some of the key sectors with sharp margin contraction included airlines, hotels, retail, healthcare and gems and jewellery,” it said.

The sharp contraction in revenues given restrictions on operations, impacted the absorption of fixed overheads in these sectors and many of them struggled to cover even operating costs. In contrast, profitability indicators were relatively stable in sectors like cement, FMCG and power, supported by commodity tailwinds in a challenging demand environment, it added.

During the current quarter, ICRA expects that margins would revive from these historic lows, supported by better distribution of fixed overheads vis-à-vis the period of negligible sales in Q1 FY2021. However, a sustained recovery to pre-pandemic levels would be gradual.

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