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Performance of Private Corporate Business Sector : 2016-17 to Q3: 2017-18
Date : Jun 11, 2018

Non-government non-financial (NGNF) listed companies posted a turnaround in 2016-17 mainly due to the improved performance of the manufacturing sector, even as losses incurred by the companies in the services sector (other than in information technology (IT)) operated as a drag on aggregate performance. Deleveraging by manufacturing companies led to lower fixed assets formation in the sector.

1. Introduction

Financial statements mandated upon companies in India by listing agreements with stock exchanges serve as a rich source of information on business conditions faced by the corporate sector. Analysis of these quarterly statements yields timely indicators of key performance parameters. From a macro-economic perspective, aggregate corporate sales reflect demand conditions in the economy. The cost of raw materials indicate input cost pressures faced by these companies from movements in domestic and international commodity prices. Likewise, staff costs are a key determinant of business competitiveness and staff cost per unit of production is a reasonably robust indicator of labour productivity. In fact, abridged quarterly earnings results of listed companies are employed by the Central Statistics Office (CSO) to nowcast the quarterly estimates of gross value added (GVA1) in the private corporate sector while the nonfinancial corporate sector’s capital expenditure gives vital clues into investment behavior. An important gauge of the pricing power is the profit margin of these corporates, with implications for the inflation outlook. Assessment of risk profiles derived from indicators of liquidity and solvency of financial institutions which have significant exposure juxtaposed with information on corporate leverage and debt serviceability are useful for evaluating financial stability from a systemic perspective.

In the period since the global financial crisis, multilateral agencies like the International Monetary Fund (IMF) have closely integrated analysis of the corporate sector and inter linkages with other sectors into their assessment of global financial stability (IMF, 2017). The recent financial stability report of the Banca d’Italia presents profitability and debt serviceability of the non-financial corporate sector based on the financial reports of a large sample of companies (Banca d’Italia, 2017). The financial statements of listed companies in China has been recently analysed in detail by the Reserve Bank of Australia in which the movements in financial measures match closely with the broader conditions faced in the Chinese economy (Reserve Bank of Australia, 2017). Detailed analysis of corporate performance are also published by various central banks (see for instance, Deutsche Bundesbank, 2017) annually.

The Reserve Bank of India (RBI) has maintained a tradition of private corporate sector analysis since 1950 (RBI, 2011). More recently, corporate sector analysis has assumed importance in the context of the commitment to secure the convergence of Indian accounting standards with globally accepted International Financial Reporting Standards (IFRS) made at the G20 summit in 2009. The new accounting standards were proposed in the Union Budget, 2014-15 and on February 16, 2016 the Ministry of Corporate Affairs (MCA) notified the ‘Companies (Indian Accounting Standards) Rules, 2015’ (Ind-AS) which became applicable for corporate financial statement filings for all listed companies from April 1, 2017 (Securities and Exchange Board of India, 2016). Ind- AS seeks a convergence between the Indian Generally Accepted Accounting Principles (GAAP) and the IFRS.

This article reviews the performance of the private (non-financial) corporate sector during 2016-17, based on the earnings results of 3,007 listed NGNF companies. Unaudited balance sheets of these companies have also been used to study the risk profile and sources and uses of funds by the Indian corporates. The rest of the article is organised in five sections. Section 2 reviews corporate performance in terms of select parameters, analyses the risk profile of these corporates, examines the sources and uses of funds by the manufacturing sector and presents the corporate performance in 2017-18 so far, along with a perspective of the demand scenario on the basis of usebased categorisation. Section 3 analyses the corporate risk profile with a focus on the performance of heavily indebted companies and the intersection of capacity utilisation and debt serviceability in investment patterns. Section 4 gives a detailed insight into the input cost pressures faced by the manufacturing companies in the recent period. Section 5 sets out some concluding observations. The data used in this article are available on the Reserve Bank’s website at https://dbie.rbi.org.in/DBIE/dbie.rbi?site=statistics#!2_42.

2. Corporate Performance

Sales growth of the select companies improved during 2016-17, but mainly due to rise in prices rather than a pick up in demand - ‘real’ sales have remained stagnant over the last four years (Chart 1). The value of production expanded despite the hardening of raw material prices. A sharp increase in overall expenditure compressed/restrained operating profits and nominal (GVA) growth. Eventually, it was other/non-operating income that shored up corporate margins (Table 1 and Table 2).


Table 1: Performance of Listed Non-Government Non-Financial Companies
Indicator 2015-16 2016-17
Amount in ₹ billion Y-o-Y Growth in Per cent Amount in ₹ billion Y-o-Y Growth in Per cent
No. of Companies 2,932 3,007
Sales 29,898 -1.6 31,316 3.1
Value of Production 29,814 -2.4 31,516 4.0
Expenditure, of which 25,269 -4.4 26,620 3.8
Raw Material 11,726 -12.4 12,300 4.8
Staff Cost 2,905 13.1 3,306 8.7
Power & fuel 1,051 -7.1 977 -1.2
Operating Profits 4,545 10.2 4,896 5.4
Other Income 918 -2.4 1,036 5.9
EBITDA 5,463 7.9 5,932 5.5
Depreciation 1,226 5.0 1,375 6.4
Gross Profits (EBIT) 4,238 8.8 4,557 5.2
Interest 1,310 5.0 1,421 4.8
EBT (before NOP) 2,927 10.5 3,136 5.4
Tax Provision 779 2.2 834 1.5
Net Profits 1,966 9.3 2,048 11.2
Note: EBITDA: Earnings before Interest Tax Depreciation and Amortization. EBT: Earnings before Tax

Table 2 : Important Performance Parameters of Listed Non-Government Non-Financial Companies
(Per cent)
Period No. of Companies Sales Growth GVA Growth Expenditure Growth Operating Profit Growth Net Profit Growth Operating Profit Margin Net Profit Margin
1 2 3 4 5 6 7 8
2009-10 2,629 11.7 19.2 9.6 26.6 28.8 16.9 9.4
2010-11 2,763 19.8 13.5 22.1 12.4 15.8 15.6 9.0
2011-12 2,679 18.5 9.1 20.7 1.7 -16.8 13.5 6.4
2012-13 2,931 9.1 8.0 9.6 3.5 -2.0 12.9 5.9
2013-14 2,854 4.7 6.6 4.2 2.3 -5.1 12.8 5.8
2014-15 2,925 1.4 8.0 0.7 5.3 -0.7 13.6 5.9
2015-16 2,932 -1.6 9.7 -4.4 10.2 9.3 15.2 6.6
2016-17 3,007 3.1 6.6 3.8 5.4 11.2 15.6 6.5

Among the major industries, iron and steel, petroleum products and cement and cement products boosted the performance of the manufacturing sector, while sales of pharmaceutical companies and the food products and beverages industries slumped (Chart 2A, Chart 2B and Table 3).


Table 3 : Sector wise Performance Parameters of Listed Non-Government Non-Financial Companies
(Per cent)
Period Manufacturing Services (Non-IT) IT
Sales Growth GVA Growth Ope
rating Profit Growth
Net Profit Growth Ope
rating Profit Margin
Net
Profit Margin
Sales Growth GVA Growth Ope
rating Profit Growth
Net Profit Growth Ope
rating Profit Margin
Net Profit Margin Sales Growth GVA Growth Ope
rating Profit Growth
Net Profit Growth Ope
rating Profit Margin
Net
Profit Margin
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
2009-10 12.9 27.4 33.1 44.2 15.8 8.5 3.6 -9.6 -1.8 -42.5 13.7 4.7 5.6 9.7 18.9 18.0 27.5 21.4
2010-11 22.4 11.9 11.7 20.0 14.3 8.2 8.5 18.2 17.6 25.3 14.3 5.4 16.9 18.1 13.5 14.4 25.8 19.8
2011-12 18.7 5.9 -0.1 -22.1 11.9 5.4 15.3 3.5 -3.9 -48.0 12.4 2.1 21.8 24.9 16.1 23.0 24.7 20.1
2012-13 8.8 6.6 2.7 2.2 11.3 5.3 11.5 10.5 11.0 -36.1 12.8 1.4 14.0 17.5 18.3 8.9 25.4 19.3
2013-14 4.2 4.0 0.0 -7.1 10.9 4.9 2.6 -4.2 -15.4 -71.7 11.6 1.2 20.4 22.5 29.1 25.7 28.2 21.1
2014-15 0.4 5.4 3.3 -7.8 11.5 4.5 3.7 23.4 38.1 $ 13.6 2.7 10.7 11.8 6.6 8.1 26.8 21.3
2015-16 -3.7 7.5 9.6 12.6 13.0 5.3 4.9 8.2 21.9 -16.9 21.0 5.0 11.3 16.3 11.9 14.5 26.6 22.5
2016-17 4.2 10.6 12.2 28.0 14.1 6.5 -1.5 -2.0 -7.7 -114.5 19.2 -0.9 9.4 8.7 8.0 8.7 25.5 21.0
Note: The ratio / growth rate for which denominator is negative is not calculated, and is indicated as ‘$’.

In the case of the latter though, the contraction in sales recorded in 2015-16 bottomed out in 2016-17.

Overall sales of the services (other than IT) sector contracted due to the poor performance of real estate and wholesale and retail trade companies. Shrinking revenue of the telecommunication industry also emerged as a major cause of concern. The operating (and net) profits of the services (other than IT) sector contracted due to significant losses incurred by telecommunication companies. In contrast, transport and storage services and hospital services industries recorded a pick up in sales (Chart 3). The IT sector witnessed moderation in sales growth; the sharp growth in staff costs in 2015-16 was not sustained.

The staff costs to sales ratio rose for the IT sector and reached its highest level since 2009-10, (Chart 4) denting the profitability of the sector. The net profit margin turned negative for the services (other than IT) sector due to the telecommunication industry.

Accretion to reserves and surplus, and recourse to trade payables were the major source of funds for manufacturing companies. In the previous year, a significant portion of funds were sourced by disinvesting from subsidiaries and liquidation of inventory (Table 4).

Table 4: Sources and Uses of Funds: Manufacturing Sector (in per cent)
Sources of Funds Uses of Funds
Time period 2015-16 2016-17 Time period 2015-16 2016-17
By Increase in Liabilities By Increase in Assets
Share Capital 0.5 Total Non Current Assets 68.8 53.9
Reserves & Surplus 27.0 47.2 -Fixed Assets (incl. Capital Work in Progress) 42.8 19.8
Money Received Against Share Warrants 0.1 -Non Current Investments 11.9 30.5
Share Application Money Pending Allotment 0.2 -Deferred Tax Assets 1.5 1.9
Total Non Current Liabilities 6.7 1.6 -Long Term Loans & Advances 1.7
-Long Term Borrowings 1.0 -Other Non Current Assets 12.6
-Deferred Tax Liabilities 2.6 1.0 Total Current Assets 20.5 27.4
-Long Term Provisions 0.7 -Current Investments 0.8 12.2
-Other Long Term Liabilities 3.0 -Inventories 9.8
Total Current Liabilities 27.0 49.1 -Trade Receivables 4.1 2.8
-Short Term Borrowings 8.5 10.0 -Cash & Cash Equivalents 1.8
-Trade Payables 18.2 -Other Current Assets 15.7 0.7
-Short Term Provisions 1.4 Other Assets 0.8 1.6
-Other Current Liabilities 18.4 19.5      
Other-Equity & Liabilities 0.6      
TOTAL 61.2 98.8 TOTAL 90.1 82.8
By Decrease in Assets By Decrease in Liabilities
Total Non Current Assets 16.3 0.4 Share Capital 1.1
-Long Term Loans & Advances 16.3 Money received against Share Warrants 0.1
-Other Non Current Assets 0.4 Share Application Money Pending Allotment 0.4
Total Current Assets 22.5 0.8 Total Non Current Liabilities 1.3 16.0
-Inventories 5.0 -Long Term Borrowings 14.8
-Cash & Cash Equivalents 0.9 -Long Term Provisions 1.3
-Short Term Loans & Advances 16.6 0.8 -Other Long Term Liabilities 1.3
      Total Current Liabilities 8.0
      -Trade Payables 0.2
      -Short Term Provisions 7.8
      Other-Equity & Liabilities 0.1
TOTAL 38.8 1.2 TOTAL 9.9 17.2
Grand total 100.0 100.0 Grand total 100.0 100.0
Note: Based on 1,780 common manufacturing companies.
Figures are normalised by total sources and uses of funds. ‘–‘represents nil entry.

Manufacturing companies used around 15 per cent of funds raised to reduce their long term debt obligations, indicating significant deleveraging, which also resulted in a sharp decline in fixed assets formation. The remaining funds were invested in financial assets and inventory accumulation, probably to safeguard against rising raw material prices.

2.1. Corporate Performance in 2017-18 so far

In Q1:2017-18, moderation in sales growth and a sharp increase in overall expenditure led to contraction in operating profits for the manufacturing sector and for the corporate sector as a whole. In sync, nominal GVA in manufacturing also contracted in the Q1:2017- 18. However, due to moderation in input costs and recovery from disruptions owing to the rollout of goods and services tax (GST), a revival in major performance parameters for manufacturing sector was observed in Q2:2017-18. Demand conditions in the manufacturing sector further picked up in Q3:2017-18 as evidenced from the sales growth and this improvement was not attributable to favourable base effects (Table 5).

Table 5: Performance of Non-Government Non-Financial Companies: Q3:2017-18
(in Per cent)
Item Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18
All Companies
No. of Companies 2,775 2,702 2,784 2,726 2,744 2,701 2,705
Y-o-Y Growth
Sales 0.1 1.9 2.8 7.2 7.6 7.2 11.3
Expenditure -1.4 1.3 5.0 9.1 11.0 5.9 10.9
Operating Profits 9.6 5.5 7.6 2.1 -10.0 5.0 7.2
GVA 9.3 8.0 7.6 2.3 -2.3 4.4 6.5
Interest 5.8 0.0 11.4 -1.6 -1.5 8.1 -5.8
Net Profits 11.2 16.0 24.6 -6.9 -21.2 -23.1 6.0
Ratios
Operating Profit to Sales 17.0 16.6 15.9 14.4 14.0 15.7 15.4
Net Profits to Sales 7.5 8.7 6.8 4.6 5.5 5.8 6.7
Manufacturing
No. of Companies 1,804 1,775 1,818 1,747 1,759 1,738 1,743
Y-o-Y Growth
Sales -1.0 3.7 4.9 10.2 8.9 9.5 14.0
Expenditure -2.6 2.9 7.6 11.2 12.4 6.4 12.3
Operating Profits 12.0 10.4 16.2 14.2 -12.0 11.2 14.0
GVA 12.0 11.2 13.8 9.2 -5.4 8.3 10.1
Interest 2.0 -2.3 7.6 -8.0 -3.4 14.3 -1.8
Net Profits 28.8 27.5 57.5 22.2 -33.6 -4.0 -2.4
Ratios
Operating Profit to Sales 15.2 14.7 14.3 13.2 12.2 14.6 14.4
Net Profits to Sales 7.2 7.9 6.2 6.0 4.4 6.4 5.7
Services (non-IT)
No. of Companies 493 508 514 498 501 494 485
Y-o-Y Growth
Sales -0.3 -3.5 -4.6 -2.9 4.1 -2.5 1.6
Expenditure -1.8 -5.7 -3.2 3.4 10.4 2.6 4.4
Operating Profits 6.1 4.3 -8.9 -25.7 -17.8 -22.7 -11.9
GVA 7.1 5.3 -4.5 -18.7 -10.1 -14.2 -2.3
Interest 32.9 11.5 32.1 3.8 2.7 16.9 -7.6
Net Profits -38.9 -3.7 -17.5 @ -66.6 @ -27.6
Ratios
Operating Profit to Sales 21.7 21.0 19.7 17.7 16.4 15.6 16.5
Net Profits to Sales 4.1 6.3 4.5 -18.9 1.7 -10.7 3.4
IT
No. of Companies 188 177 187 181 180 175 171
Y-o-Y Growth
Sales 11.2 7.2 7.3 4.8 2.9 4.4 5.3
Expenditure 11.8 8.2 7.8 4.7 4.2 4.5 5.7
Operating Profits 10.1 2.2 6.0 4.4 -1.4 4.6 3.9
GVA 9.6 7.4 6.8 4.2 5.3 4.8 6.2
Interest -11.0 -31.5 2.2 9.0 -12.1 -0.3 -35.0
Net Profits 7.5 4.8 9.8 2.2 9.3 5.8 17.4
Ratios
Operating Profit to Sales 25.7 25.8 26.0 24.9 24.7 25.8 25.7
Net Profits to Sales 20.8 21.8 21.4 20.2 22.4 22.0 24.1
Note: To compute the growth rates in any period, a common set of companies for the current and previous period is considered.
The ratio for which denominator is negligible is not calculated and is denoted by ‘@’.

In spite of the transitory shocks imposed by demonetisation and GST, there was no evidence of de-stocking and liquidation of inventory by the listed manufacturing companies. A demand scenario analysis from a use-based perspective reveals that while GVA growth of the private corporate sector turned negative in the first quarter of 2017-18, that of consumer durables recorded steady growth. Real sales and nominal GVA growth of construction goods decelerated after demonetisation, but more prominent effects were observed in consumer non-durables in which sales and nominal GVA contracted. Lower fixed asset investment by manufacturing companies was reflected in weak demand of capital goods, resulting in continuously deteriorating GVA for companies engaged in the sector. The revival in nominal GVA growth of the manufacturing sector in Q3:2017-18 was supported by steady growth in primary, intermediate, construction goods and consumer durables. The growth in sales as well as nominal GVA of capital goods was in sync with the fixed assets investment of the manufacturing sector in H1:2017-18.

3. Corporate Risk Profile

Among companies with a leverage ratio of more than 200 per cent and an ICR (interest coverage ratio) of less than 1 (including companies with negative net worth), the textiles and the telecommunication corporates appeared fragile and debt at risk rose significantly in 2016-17 in these industries. The share of debt held by the ‘vulnerable’ construction companies also remained elevated (Table 6).

Table 6 : Debt at Risk – Listed NGNF Companies- Industry wise
  Total Debt (₹ Billion) No of vulnerable Companies Debt at risk (₹ Billion) Share of debt at risk (per cent) Total Debt (₹ Billion) No of vulnerable Companies Debt at risk (₹ Billion) Share of debt at risk (per cent) Total Debt (₹ Billion) No of vulnerable Companies Debt at risk (₹ Billion) Share of debt at risk (per cent)
  Textiles Telecommunication Construction
No. of Companies 256 11 144
Period 1 2 3 4 5 6 7 8 9 10 11 12
2014-15 728 52 187 25.7 782 4 141 18.0 1007 19 289 28.7
2015-16 824 53 360 43.7 1258 4 174 13.8 1092 25 357 32.7
2016-17 831 54 457 55.0 1566 5 724 46.2 1086 25 404 37.1
Note: Total debt is the sum of long term and short term borrowings. Debt at risk defined as total debt held by vulnerable companies.

A stark contrast was observed in the performance of heavily indebted companies (i.e., those with debt equity ratios more than 200 per cent and debt to total assets ratio greater than 50 per cent in 2015-16) in the manufacturing vis-a-vis the rest of the sample. Although the indebted manufacturing companies reduced their debt levels in 2016-17, they performed poorly in terms of fixed assets investment (capex), debt serviceability (ICR) and profitability (return on assets) (Chart 5A).

On the other hand, there was an increase in debt levels of indebted infrastructure companies, resulting in worsening of debt serviceability and profitability. The issuance of new debt for the infrastructure companies is mainly determined by the internal rate of return (IRR) of the projects undertaken (Chart 5B).

Listed manufacturing companies tilted their investments towards financial assets and away from fixed assets in view of the persistently low capacity utilisation (CU) and the overall deleveraging witnessed in this sector. In this context, this section presents an analysis of the investment pattern of these companies in 2015-16 and 2016-17 classified according to debt serviceability (ICR) and CU. Thus, the NGNF listed manufacturing companies are classified into three categories of CU (high/medium/low) and two categories of debt serviceability (ICR<1 or ICR≥1) in the base year 2014-15.

Distressed companies (with ICR<1 in 2014-15) liquidated their investment in both fixed and financial assets in 2016-17; among them, companies with higher CU preferred to liquidate fixed assets whereas companies with low CU liquidated financial assets (Chart 6A).

Companies with ICR≥1 in the base year i.e., 2014-15 were found to be investing more in financial assets than in fixed assets in 2016-17 across all CU categories with a stark difference for medium CU companies. Companies in the high CU category also reduced their investment in fixed assets in 2016-17 compared with the previous year (Chart 6B).

4. Movements in the Cost of Raw Materials for Manufacturing Sector

Cost of raw materials (CRM) of the manufacturing sector continued to rise at a fast pace in Q1:2017-18 after peaking in the previous quarter, denting nominal GVA and operating profits of the sector. Input cost faced by the manufacturing companies showed no sign of easing till Q3:2017-18, in sync with the firming up of domestic and international industrial raw materials (IRM) inflation (Chart 7).

A decomposition of CRM growth by industry reveals that a major portion stemmed from motor vehicles, iron and steel, and petroleum products industries in Q3:2017-18.

The CRM growth of industries importing metal and crude petroleum for production moved in tandem with international energy and metal index inflation (Chart 8A and 8B).


5. Conclusion

A turnaround in sales growth of the corporate sector took hold in 2016-17 and has extended into the current year so far. Nominal GVA growth of the manufacturing sector turned negative in the Q1:2017-18 due to input cost pressures and it revived on account of steady growth of output. While the demand for consumer durables and non-durable goods was hit by demonetization, sales of consumer durables revived after a temporary drop and there was no sign of recovery for the consumer nondurables companies. Low capacity utilisation in the manufacturing sector led to significant deleveraging as well as lower investments in fixed assets, with companies preferring investments in financial and liquid assets. Deleveraging undertaken by highly indebted manufacturing companies should translate into better risk profile of this sector in the coming years, however, preference of investment channels other than fixed assets by the healthy corporates probably hints at transaction cost motive and subdued credit demand in the economy. The listed manufacturing companies reduced current assets and increased long term investments in H1:2017-18, possibly hinting towards a revival in capex cycle. Further revival in the demand scenario will be the key for the private corporate sector performance in the coming quarters as there has been no signs of respite from input cost pressures.

References

1. Banca d’Italia (2017), Financial Stability Report, November.

2. Deutsche Bundesbank (2017), Corporate Financial Statements.

3. International Monetary Fund (2017), Global Financial Stability Report, April.

4. Reserve Bank of Australia (2017), Conditions in China’s Listed Corporate Sector, Bulletin June.

5. Reserve Bank of India (2011), Compendium on Private Corporate Business Sector in India - Select Financial Statistics, 1950-51 to 2008-09.

6. Securities and Exchange Board of India (2016), Revised Formats for Financial Results and Implementation of Ind-AS by Listed Entities.


* This article is prepared by Shri Kashyap Gupta and Shri Saptarshi Ghosal under the guidance of Shri Anujit Mitra in the Corporate Studies Division, Department of Statistics and Information Management. The views expressed in the article are those of the authors and do not represent the views of the Reserve Bank of India.

1 GVA is the sum of earnings before tax and payment towards interest, depreciation and wages/salaries.


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