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Macro lessons from the 2QFY22 corporate results

Widening divergence between the expectations of businesses and households

RBI released its 2QFY22 financials of listed non-government, non-financial (NGNF) companies. Given below are the few macro lessons from the following:

* Net sales for the listed NGNF corporate sector (comprising of ~2,700 companies) grew 32% YoY in 2QFY21, with aggregate sales at a record high of INR11.6t in the quarter (Exhibit 1). Total expenditure grew 36% YoY in 2QFY22, led by a 46%/38% growth in ‘raw materials’/‘power and fuel’ costs.

* Using data for the past decade (since 3QFY12), we find that corporate sales are very strongly correlated with headline WPI (Wholesale Price Index) measure of inflation (Exhibit 2). Both sales growth and headline WPI inflation have been at extreme levels during the past few quarters.

* With lower debt and interest rates, the interest coverage ratio improved to a decade high (this data is available only since FY12) of 5.3x in 2QFY22 vis-à-vis 3.7x a year ago and 3.4x in FY20 (Exhibit 3).

* EBITDA margin, though, seems to have stabilized at record highs of over 20% in the past six consecutive quarters (Exhibit 4). It stood at 20.7% in 2QFY22, lower than the recent peak of 22.6% in 3QFY21, but higher than the 17.8% in FY20 (Exhibit 4). EBITDA margin for the manufacturing sector has increased from the preCOVID average of 17% to ~20% in the past few quarters, while it has averaged 25-26% for the services sector, only marginally higher than 25% in FY16-17 (Exhibit 5).

* Combining data on financial companies and public sector enterprises (PSEs), the combined net profit of listed companies crossed INR2t for the first time in 2QFY22. Rising from the two-decade low of 1.8% of GDP in FY20, PAT-to-GDP ratio of listed companies has improved to 3% of GDP and further to a decade high of 3.7% of GDP in 1HFY22 (Exhibit 6).

* While raw material costs are rising at a faster pace, ‘employee costs’ of NGNF companies grew at the highest pace (16.6% YoY) in the last nine years in 2QFY22 (Exhibit 7). Adjusting for inflation, real employee costs rose 11% YoY in 1HFY22. Including financial companies and PSEs, growth in real employee cost was modest at 7.5% YoY in 1HFY22. As explained in our recent note, notwithstanding such a strong rise in employee costs, it is very likely that it represents more hiring by the listed companies, rather than wage inflation.

* As discussed earlier, the listed corporate sector has gained massively during the COVID-19 outbreak vis-à-vis a decline in the rest of the economy (RoE). Nominal GVA1 (gross value-added) of listed non-financial companies2 (NFCs) rose 32% YoY in 1HFY22, which implies that GVA of RoE increased 20% during this period (Exhibit 8).

* With better performance of listed NFCs, their share in the national GVA has increased to 9.3% in 1HFY22 from its low of 7.5% in FY20, marking the highest level in nine years (Exhibit 9). The distribution of listed NFCs GVA by factors of production reveals that the share of entrepreneurs (measured by PBT) stood at 40.2% of GVA, the highest since the quarterly data began in FY13. The share of labor has remained broadly stable at 35%, while the share of capital (interest + depreciation) has fallen to just 25% in 1HFY22 (Exhibit 10).

* Overall, the listed corporate sector continues to perform really well. The surge in input costs has been broadly passed on, helping to keep record high EBIDTA margin broadly intact, at least as of 2QFY22. It is then not surprising that expectations of the business community (measured by the Industrial Outlook Survey, IOS) stood at a two-decade high in 3QFY22, while consumers continue to feel the heat (Exhibits 11 and 12).

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