Number Theory: What do corporate results tell us about the economy?
After bouncing back from the second wave of the Covid-19 in the quarter ending September 2021, inflation-adjusted sales rose continuously for the subsequent three quarters till June this year.
India’s GDP grew by 6.3% in the quarter ending September 30, according to data released by the National Statistical Office (NSO) on November 30. Headline GDP numbers, however, tell us little about the nature of economic growth. While high frequency data on the informal sector is not available in India, there exist databases that can give an insight into the state of the formal sector. An HT analysis of the latest quarterly results from the Centre for Monitoring Indian Economy’s (CMIE) Prowess database – it is among the largest databases of corporate performance – does just this. There are 2,176 non-financial companies in the Prowess database for which September quarter results are available along with quarterly results for last five years. Here are five charts that explain how they are doing.
Sequential contraction in inflation adjusted sales
After bouncing back from the second wave of the Covid-19 in the quarter ending September 2021, inflation-adjusted sales rose continuously for the subsequent three quarters till June this year. The latest data, however, indicates a slight loss in growth momentum in the September quarter with a sequential contraction of 2.6% .
If one were to compare the latest numbers with the same quarter of the past year, the corporate sector does well in terms of growth. Inflation adjusted sales are 21% higher in September this year over the year-ago number. There is no element of favourable base effect since they had crossed pre-pandemic levels in September 2021 itself. To be sure, these numbers have to be read with the caveat that they might change when quarterly results for a larger sample of companies are available.
Manufacturing shows a bigger sequential contraction than the GVA numbers
Of the total sample for which results are available for September quarter, 1,421 non-financial companies belong to the manufacturing sector. These numbers are from the publicly listed companies, and can tell us only on the state of formal manufacturing activity. An analysis of the latest data shows that inflation adjusted sales of the manufacturing companies shrank by 4% in the September quarter from the June quarter. This figure is 2.83 percentage points higher than the contraction (1.17%) reflected by the manufacturing component of the Gross Value Added, which covers both formal and informal manufacturing activities, over the same period.
However, if one were to make a normal year-on-year comparison for the September quarter , the opposite trend emerges in the two datasets. Prowess data shows a healthy 20% growth in inflation adjusted sales of manufacturing companies, while the manufacturing component of the Gross Value Added indicate a 4.3% contraction over the same period.
Rising costs are deterring growth in profits
An year-on-year comparison shows that the inflation adjusted profits (net) of non-financial companies contracted by 28% in September quarter. This marks the second consecutive contraction in the growth of net profits after the June quarter (1.3% contraction). This has occurred at a time when the costs have grown 3.7 percentage points faster than the sales growth (or revenue growth). It is important to read growth in costs with sales because costs can be driven by both input cost inflation as well as a rise in production.
See Chart 3: Yearly growth in costs, and profits
Raw material costs rising at a faster pace than wage costs
The rise in total costs is mainly because of the rise in the cost of raw materials, which accounted for almost two-thirds of the total costs in the September quarter. While the yearly growth in wage component of the costs has been hovering around 7% in the past four quarters, the yearly growth in the cost of raw materials spiked to 64% in June and 33% in September. To be sure, the cost of raw materials is available only for 1670 companies, which is slightly more than three-fourth of the available sample on wages (2176).
Size-wise analysis of firm performance
What sort of firms are driving the growth in sales? An analysis of sales growth by revenue size of firms can help us answer this question.
Not all companies have shown positive growth in September. Only big firms are driving sales growth. Firms with quarterly sales between ₹100 crore and ₹500 crore, and those with sales above ₹500 crore saw a 4.6% and 22.75% growth in inflation adjusted sales in the September quarter from a year ago. While medium-sized firms, with sales between ₹25 crore and ₹100 crore, performed well in the June quarter by exhibiting a 13.5% annual growth, their sales in the September quarter was flat when compared to the year-ago period . What is worrying is the fact that small firms, those with sales below ₹25 crore, are still reeling under the impact of the pandemic. For the past five quarters, they have seen a year-on-year decline in sales. CHECK
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