The aggregated sales growth of the private (non-financial) corporate business sector improved marginally during H1:2014-15 with a combination of improved sales growth during Q1 followed by a deceleration in Q2 of 2014-15. This is primarily due to a sluggish sales growth in the manufacturing sector and moderation for the services including IT sectors. EBITDA margins improved despite moderation in sales to a level earlier observed in H1:2011- 12. Profit growth and profit margins (EBITDA and Net profit) witnessed improvement across all size groups. Sales growth increased in major industries except in textiles and construction during H2:2013-14 and H1:2014-15. Performance of the private (non-financial) corporate business sector over the quarters revealed that sales growth(Y-o-Y) decelerated in the second quarter of 2014- 15 as compared to the previous quarter and an upturn noticed earlier in Q2:2013-14 and then in Q1:2014-15 could not be sustained. Net Profit margin was maintained at similar levels during the first two quarters.

The article analyses the performance of the private (non-financial) corporate business sector during the first half (April- September) of 2014-15, based on earnings results of 2,965 listed companies. Besides analysing the aggregate performance, it provides a brief analysis by size and major industry groups. It also captures the trend in sales, expenditure and profit margins of the private corporate sector over a longer horizon. Detailed quarterly data has been made available periodically in the website of the Reserve Bank of India (Q2:2014-15 data released on 24th December 2014).

1. Upsurge in Net Profit at the aggregate level

1.1. Sales growth (Y-o-Y) of 2,965 listed companies of the private corporate sector improved marginally during H1:2014-15. Aggregate sales growth decelerated for previous three half-years. Though total expenditure showed downward trend since H1:2011-12, cost of raw materials witnessed higher growth in H1:2014-15 (Table 1). In contrast, staff cost declined from H1:2013-14 level and recorded lowest growth since H1:2010-11. Likewise interest expenses growth declined considerably during current half-year. But interest expenses as a proportion to sales and overall expenditure remained at the level of H1:2013-14.

1.2. Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA or operating profits) and earnings before interest and tax (EBIT) have grown considerably during current half-year against a contraction in the corresponding period in 2013-14. Earnings before tax (EBT) witnessed a buoyant growth owing to lower growth in interest expenses. Growth rate in net profits before adjusting non-operating income jumped steeply from -11.4 percent in H1:2013-14 to 20.1 percent in H1:2014-15. Net profits after adjusting non-operating income increased further to 32.6 per cent indicating a significant addition to income other than the normal operations of business. EBITDA and net profit margins witnessed improvement in H1:2014-15.

2. Large Companies performance improved

2.1. Large companies (annualised sales more than `10 billion) witnessed modest increase in sales growth after moderation since 2012-13. Sales growth of the medium sized companies (annualised sales between `1 billion to `10 billion), after slight improvement in H1:2013-14, again decelerated during 2014-15. Sales of small companies (annualised sales up to `1 billion) continued to contract during H1:2014-15 (Table 3).

2.2. Companies across all size groups witnessed improvement in EBITDA growth with a remarkable recovery for the small companies for the first time after successive contractions since H2:2010-11, particularly for the pharmaceutical industry. Net profit growth sharply increased for medium and large sized companies whereas small sized companies witnessed reduction in losses.

2.3. EBITDA and net profit margins have improved for medium and large sized companies. In case of small sized companies, EBITDA margin improved slightly over corresponding period of the previous year.

2.4. Interest coverage ratio (EBIT/Interest Expenses) was in range of 3.5 to 4.0 for large companies during the period of H2:2011-12 to H1:2014-15. For medium and small companies it worsened continuously since 2009-10 and recorded a minor improvement for small companies in H1:2014-15.

2.5. The increase in EBITDA growth and better interest coverage for the small sized companies did not mitigate the deteriorating liquidity and solvency of these companies. Debt repayment capacity if measured as a ratio of total borrowings to EBITDA for small companies declined in H1:2014-15 as compared to H1:2013-14. Quick and current ratio contracted while leverage ratio increased whereas the overall and the manufacturing sector leverage showed downward movement in H1:2014-15.

3. Sales growth for IT sector declined; Margins maintained across sectors

3.1. The manufacturing sector has shown a gradual improvement in the sales during H2:2013-14 and H1:2014-15. The sales growth of the non-IT services sector declined successively from a level of 13.3 per cent observed in the second half of 2012-13 till second half of 2013-14 and showed only a minor improvement in H1:2014-15.

3.2. A closer look at the components of expenditure as a proportion to sales for the manufacturing sector indicated a steady decline in the cost of raw materials to sales ratio for large companies and also the sector as a whole. However, the ratio increased for the small sized companies within the manufacturing sector. Staff cost to sales went up in H1:2014-15, though it remained higher for the small sized companies. Interest to sales ratio remained flat for large and medium sized companies in manufacturing and the non-IT services sectors, while that of the small companies showed an increasing trend till H2:2013-14 and thereafter declined in H1:2014-15, remaining distinctly higher than the manufacturing sector as a whole.

3.3. The trend in EBITDA margin for the manufacturing sector closely followed that of the ratio of raw-materials to sales while it remained close to an average of 11.4 per cent during the seven consecutive half-years. Both EBITDA and net profit growth rates for the non-IT services sector shot up in H1:2014-15, to pull up the sunken margins above the average for the seven half-years.

3.4. In H1:2014-15 the manufacturing sector witnessed a rise in the non-operating surplus. This additional surplus accounted for 12.6 per cent of net profits in H1:2014-15, which is maximum in the period of seven half-years considered for the study and also remained higher than the levels observed for the services (IT and non-IT) sectors.

3.5. The IT sector, after recovering from its lowest sales growth of 6 per cent in the second half of 2012-13, was the only sector to report a moderation in sales growth in H1:2014-15. The Y-o-Y growth rates for EBITDA and net profits declined significantly in H1:2014-15. However, EBITDA margin was maintained at similar levels as H2:2013-14, while net profit margin improved.

4. Sales growth showed upward turn in major industries except in textiles and construction

4.1. In the basic goods sector, sales growth of iron & steel and cement industries went up at noticeable rate in H2:2013-14 and H1:2014-15, which was declining from H2:2011-12 to H1:2013-14. EBITDA margin also grew successively for two half-years after H1:2013-14. Size wise analysis shows a mixed picture indicating considerable growth of large and medium companies, while no improvement is observed in small companies (Table 6).

4.2. In the consumer goods sector, textile industry suffered steady decline in sales growth with moderation since H2:2012-13, while motor vehicle industry witnessed sharp rise in sales growth during the period, after a contraction in previous three half-years (Chart 3.5). In pharmaceutical industry, sales growth declined in H1:2014-15 after showing a good growth in H2:2013-14. EBITDA margin went up in all industries including textiles even with declining sales growth. Net Profit margin increased further in pharmaceutical industry only showing good results for large companies. However, the pharmaceutical industry added a considerable amount of non-operating surplus accounting for total 37 per cent of such income for the entire manufacturing.

4.3. In capital goods sector, machinery industry maintained the momentum in sales growth in H2:2013- 14 and H1:2014-15, which was falling sharply since H2:2011-12. EBIDTA margin and net profit margin declined in H1:2014-15 after showing a marginal recovery in H2:2013-14 (Chart 3.6).

4.4. Construction industry showed continuous contraction in sales growth in H2:2013-14 and H1:2014- 15. It had started declining from H1:2013-14. While net profit margin improved initially in H2:2013-14 but declined in H1:2014-15, EBITDA margin declined in H2:2013-14 and improved in H1:2014-15 (Table 6). In electricity generation & supply industry, sales growth showed steep contraction in H2:2013-14 but improvement was seen in H1:2014-15. EBITDA margin maintained its level in both the half-years, while net profit margin increased in H2:2013-14 noticeably and then declined in H1:2014-15. Large companies of this industry witnessed improvement in the three parameters- sales, EBITDA margin and profit margin (Table 6).

5. On a quarterly basis, sales growth decelerated, profit margin improved.

5.1. An analysis of the performance of listed nonfinancial private corporates over the quarters reveal that the upturn in the aggregate sales growth (Y-o-Y) observed during Q2:2013-14 and Q1:2014-15 could not be sustained and a considerable decline was observed during Q2:2014-15 as compared to Q1:2014-15 (Table 7). Y-o-Y growth in interest expenses contracted in Q2:2014-15 against a sharp increase of 19.9 per cent observed in Q2:2013-14. Interest coverage ratio (EBIT/ interest expenses) was higher than the levels observed in Q2:2013-14, however this was only a marginal improvement. EBITDA growth was also distinctly higher in Q2:2014-15 than the levels observed in Q2:2013-14, though it was at about half, when compared with Q1:2014-15. Without being affected by decelerating sales growth, net profit growth improved on a Y-o-Y basis and net profit margins also improved from the levels observed in Q2:2013-14.

Annex

Explanatory Notes

1. To compute the growth rates in any period, a common set of companies for the current and previous period is considered.

2. The classification of industries and sectors broadly follows the National Industrial Classification (NIC).

3. The manufacturing sector consists of industries like Iron & Steel, Cement & Cement products, Machinery & Machine Tools, Motor Vehicles, Rubber, Paper, Food products etc. This does not include ‘Tea Plantations’ and ‘Mining & Quarrying’ industries. The services (other than IT) sector includes Real Estate, Wholesale & Retail Trade, Hotel & Restaurants, Transport, Storage and Communication industries. This does not include Construction and Electricity Generation and Supply Industries.

4. FOREX gain and loss are reported on net basis by companies and included in the net profit calculation. While net FOREX loss is considered as a part of the expenditure and thus included in EBITDA, net FOREX gain is considered as a part of other income and included in EBIT.

5. Other income includes various regular incomes like rents, dividends, royalties etc. and does not include extra-ordinary income/expenses.

6. Extra-ordinary income/expenses are included in EBT and net profit. As the name suggests, these income/expenses can be very large for some of the companies in a particular quarter.

7. Some companies report interest on net basis. However, some companies include the interest expenses on gross basis, where, interest received is reported in other income.

8. The ratio/growth rate for which denominator is negative or negligible is not calculated, and is indicated as ‘$’.

Glossary of Terms

* Prepared in the Corporate Studies Division of the Department of Statistics and Information Management, Reserve Bank of India, Mumbai. The previous study ‘Performance of Private Corporate Business Sector, during first half of 2013-14’ was published in the February 2014 issue of the RBI Bulletin.