The Indian corporate sector saw its profit and loss statement improve dramatically in 2018-19, Centre for Monitoring Indian Economy (CMIE) said in a report on Friday. Despite the strong growth in financials, Indian companies refrained from investing in new assets as the fiscal saw one of the lowest asset growths, the report added.
The Mumbai-based think tank stated that the financial year ended with Indian companies reporting robust growth. Total income across the corporate sector increased by 14.9 per cent after five consecutive years of single-digit growth rates. Growth from sale of goods was recorded to be 15.1 per cent, 23.1 per cent from non-financial services, and 10.5 per cent from financial services.
"Profit before direct taxes bounced back with a growth of 25 per cent after a fall of 18 per cent in 2017-18. And, profit after tax shot up by 29 per cent after a fall of 33 per cent in the preceding year. Net profit margin on sales and the returns on capital employed, both doubled compared to the levels in the preceding five years," CMIE said in its report.
The fiscal, however, saw little interest among Indian non-financial companies to invest in new assets despite strong financial. "In spite of the robust earnings in 2018-19, corporate India stayed away from investing for future capacities. Net fixed assets of non-finance companies grew by only 6.4 per cent. This is among the lowest asset growth registered by Indian companies," CMIE said.
For this analysis, CMIE studied a sample of 3,886 non-finance companies engaged manufacturing, mining, electricity generation and distribution, construction and non-financial services. According to CMIE, these companies reported 3.4 per cent growth in plant and machinery, 2.3 per cent in land and 3.7 per cent in buildings. The reluctance to acquire future capacities has been present for a while now as this was the third consecutive year of single-digit growth in net fixed assets, the think-tank said in its report. The situation remained unchanged even though the companies in the sample showed balance sheets strong enough "to borrow and grow". "Perhaps, the corporate sector requires this growth to be sustained for a little longer for its excess capacity to be absorbed before they start investing aggressively again," CMIE said.
"The sharp cuts in direct taxes for companies may improve margins and strengthen the balance sheet even further. But, an increase in margins and a strong balance sheet was evidently not a sufficient condition in 2018-19 for companies to invest aggressively into new capacities. Sustained growth based on a pick-up in demand is important," the think-tank added.