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Corporate performance and the big FY23 challenge

Corporate performance and the big FY23 challenge

Corporate India performed well in FY22 overall, but serious disruptions thereafter could upset the best plans of companies.

Illustration: Anirban Ghosh Illustration: Anirban Ghosh

Earlier this month, Bank of Baroda’s (BoB) Chief Economist Madan Sabnavis sent out a detailed study of Corporate India’s performance for FY22 which contained some important pointers about how the corporate sector fared in the last fiscal. Figures showed that the corporate sector had managed to stage a smart recovery as the economy opened up once again and the low base effect of 2020-21, thanks to the lockdowns that year, was also in evidence. The BoB study showed that sales of a sample of 2108 companies grew by 27.5 per cent, compared with de-growth of 1.9 per cent in FY21 and 0.8 per cent in FY20. This does indicate a possible turning point for the sector. Even growth over FY20 was high at 25.1 per cent, the study pointed out.

The study showed that a similar performance was also reflected in growth in profits where both operating profit and net profit grew by 17.3 per cent and 57.4 per cent, respectively, in FY22. However, profit growth was high in FY21 too with companies working on lowering their employee cost through a combination of layoffs and pay-cuts or a combination of the two to control growth in expenses, it said. If the banking, financial services and insurance (BFSI) sector is excluded from this, the performance looks even better, since in FY21 the BFSI sector was less hit by the adverse effects of the lockdown-led disruptions. Keeping BFSI out, sales increased by 35.3 per cent in FY22 while operating profit and net profit increased by 24.8 per cent and 64.8 per cent, respectively. 

Looking closer at the findings of the study, some important takeaways emerge. As has been discussed in corporate circles, the recovery has not been uniform. The overall growth in turnover has been dominated by the large companies, those with turnover of over ₹250 crore. There were 1055 companies which would qualify as being large in the sample of 2108 units, which is around 50 per cent. These companies accounted for almost 80 per cent of sales of the aggregate sample companies, the study showed. 

And despite the overall improvement in corporate performance, the stress in the micro sector continued in FY22. While the figures showed lower rate of de-growth in topline for the 303 micro industry players, with de-growth reducing from 69.6 per cent in FY21 to 25.3 per cent in FY22, the problems for the micro units was far from over, according to the data. The small sector firms, on the other hand, managed to record a positive growth figure, with sales rising 7.2 per cent in FY22 compared to a sharp de-growth of 58.4 per cent in FY21. Remember, the government and the Reserve Bank of India put out a slew of targeted measures aimed at helping the stressed MSME sector during the pandemic.

If one looks at sectoral break-ups, most sectors, the study has shown, have performed well in FY22 as the pandemic started ebbing, the vaccination drive gathered serious momentum and Corporate India got better prepared to deal with Covid-related disruptions in successive waves of the infection. There was, therefore, an improvement in sales and profits across all segments, according to the study. However, sectors which showed higher-than-sample growth rates included automobiles, capital goods, diamonds and jewellery, iron and steel, industrial gases, and mining, among others.

That was FY22. The current fiscal will be an altogether different matter. The continuing war in Ukraine, the consequent disruptions in supply chains, runaway global inflation and rising interest rates the world over have meant that Indian companies will face a dangerous cocktail of problems this fiscal, which is bound to hit companies hard, and the micro sector the hardest. A chat I was having with seasoned market-watcher and corporate analyst Arun Kejriwal brought out the challenges the Indian corporate sector is going to face. The textiles sector will be hit by runaway prices of cotton and yarn prices, hitting their profitability badly. For the FMCG sector—as reported by Business Today several times earlier—the huge increase in commodity prices will mean depressed margins and, when the higher prices are partly passed through to consumers, decline in demand. Consumers will either defer purchases or move to lower priced products as higher prices hit home. Ditto for the edible oil sector.

The cement sector hasn’t seen a great first quarter of FY23, where players, hit by inflation, put out some price increases. But the next quarter will likely be much more difficult. On the steel sector, while global majors have projected a contraction in steel demand, there is some hope in India that with China not adding large capacities annually, the steel sector may not be that impacted. However, rising input prices are bound to take a toll.

The auto sector, which has seen a good FY22 as demand returned, is seeing supply constraints on the chip side decreasing, and the upper end of the market is likely to continue to be buoyant. The mid segment, though, will likely face pressures going forward.

Kejriwal points out that this period of global and domestic stress will separate the men from the boys. There is a long pipeline of IPOs, but the choppiness in the markets has meant nobody really is willing to take the plunge just yet. Global turmoil, rising inflation and interest rates are bound to keep the markets on tenterhooks for a while.

Coming back to MSMEs, with oil prices rising sharply, the plastics sector which has several MSMEs will likely be badly hit once again, since they don’t have the pricing power to pass on the higher input costs. The stress which remains in the micro sector will continue. On the rupee side, with rising global interest rates, there will be pressure on the rupee, which, while hitting imports badly, will be good news for the IT sector.

All in all, the first quarter corporate performance for FY23 will provide some important signals to the rest of the fiscal. With global uncertainties—both on the war front and on interest rates—showing little signs of easing, the Indian corporate sector will once again need to steel its nerves and face challenges in subsequent quarters. This will be a true test of leadership and those CEOs who are able to navigate these next few quarters and make quick course corrections where necessary will emerge winners. The test is on.

The author is Editor, Business Today.

 

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