Corporate performance shows a clear trend of demand destruction

Dec 7, 2015


Last week the Reserve Bank of India (RBI) released the data on the performance of non-financial private corporate business sector during the second quarter of 2015-16 (July- September 2015). This data makes for a very interesting reading.

The data aggregates the financial results of 2,711 listed nongovernment non-financial companies during the period July to September 2015. Take a look at the following table which summarises the performance of the companies. Also, please keep in mind that "to compute the growth rates in any quarter, a common set of companies for the current and previous period is considered." This has had to be done because the number of companies across quarters does not match. So while 2863 companies have been taken into account for July to September 2014 results. Only 2,711 companies have been considered for the period July to September 2015.

Indicator July to September 2014 April to June 2015 July to September 2015
Amount in Rs billion Year on year growth in Per cent Amount in Rs billion Year on year growth in Per cent Amount in Rs billion Year on year growth in Per cent
No. of Companies 2,863 2,723 2,711
Sales 8,107 4.2 7,639 -2.4 7,517 -4.6
Value of Production 8,148 4.2 7,694 -2.4 7,479 -5.6
Expenditure, of which 7,076 3.6 6,534 -3.5 6,330 -7.8
  Raw Material 3,760 3.4 3,199 -11.8 2,994 -18.7
  Staff Cost 649 7.7 681 10.2 689 9.0
  Power & fuel 297 3.7 284 -3.0 276 -4.2
Operating Profits (EBITDA) 1,073 8.3 1,160 3.7 1,149 8.9
Other Income 275 26.1 215 1.8 250 -5.8
Depreciation 297 3.5 304 3.6 301 4.0
Gross Profits (EBIT) 1,051 14.1 1,070 3.4 1,099 6.5
Interest 326 -0.6 342 9.5 333 8.4
EBT (before NOP) 725 22.1 729 0.7 766 5.6
Tax Provision 204 29.0 211 6.0 219 9.6
Net Profits 537 25.6 514 -9.5 577 9.9

The table clearly shows that the sales of the companies during the period July to September 2015 fell by 4.6%, in comparison to the same period last year. Despite falling sales the net profits went up by 9.9%. There are a couple of important points that need to be made here.

Falling sales show that businesses lack pricing power. This is because the consumer as well as industrial demand for products hasn't been going up at the same pace as it was in the past. Nevertheless, despite falling sales, the net profit went up by close to 10%. What is happening here? The raw material costs of businesses fell by 18.7% during the three month period in comparison to a year earlier.

As CARE Ratings pointed out in a recent research note: "The negative growth in net sales is largely attributed to weakness in demand and pricing power. Despite negative producer's inflation as measured by the wholesale price index signalling also lower raw material costs, growth in profits do not appear to be satisfactory."

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The raw material cost during the period stood at a total of Rs 2,99,400 crore. This was Rs 76,600 crore lower. Profit on the other hand jumped by around Rs 3,900 crore during the quarter. Hence, the entire jump in profits has come from lower raw material costs.

Raw material costs have fallen largely due to falling global commodity prices. Power and fuel costs have also eased by Rs 2,100 crore. This has helped businesses bring down total expenditure by Rs 74,500 crore during the quarter and in turn, help report greater profits.

Now let's dig a little deeper and look at how manufacturing and services companies have done.

Indicator Manufacturing
July to September 2014 April to June 2015 July to September 2015
Amount in Rs billion Year on year growth
in Per cent
Amount in Rs billion Year on year growth
in Per cent
Amount in Rs billion Year on year growth
in Per cent
No. of companies 1,910 1,828 1,828
Sales 5,896 3.9 5,414 -4.8 5,275 -7.8
Expenditure, of which 5,270 3.5 4,732 -6.2 4,534 -11.3
  Raw Material 3,374 3.0 2,882 -13.0 2,697 -19.1
  Staff Cost 293 11.3 311 10.8 309 9.4
  Power & fuel 168 10.5 164 2.8 158 -2.5
Operating Profits (EBITDA) 649 7.9 717 4.0 699 11.0
Other Income 127 20.1 119 -3.9 140 12.5
Depreciation 184 3.0 187 4.1 181 2.4
Gross Profits (EBIT) 592 12.0 649 2.4 658 13.9
Interest 188 3.2 196 9.4 182 4.2
EBT (before NOP) 404 16.7 453 -0.4 476 18.1
Tax Provision 131 30.1 135 6.9 137 6.2
Net Profits 281 21.6 310 -14.3 333 19.8

The manufacturing sector includes companies operating in Iron & Steel, Cement & Cement products, Machinery & Machine Tools, Motor Vehicles, Rubber, Paper, Food products etc. The sales of these companies have fallen by 7.8% during the three month period between July and September 2015. This shows a slowdown in industrial as well as consumer demand.

The profits on the other hand, tell a completely different story jumping by 19.8%. This was primarily on account of raw material costs falling by 19.1%, during the period. It needs to be mentioned here that for profits to continue to grow raw material costs will have to continue to fall, so that expenditure can be controlled or brought down.

For raw material prices to continue to fall, commodity prices need to continue to fall. Commodity prices have already fallen quite a lot. Hence, for profits to grow in the next financial year sales of companies need to start growing as well.

Let's take a look at the performance of services sector which includes companies operating in Real Estate, Wholesale & Retail Trade, Hotel & Restaurants, Transport, Storage and Communication industries.

Indicator Services
July to September 2014 April to June 2015 July to September 2015
Amount in Rs billion Year on year growth
in Per cent
Amount in Rs billion Year on year growth
in Per cent
Amount in Rs billion Year on year growth
in Per cent
No. of companies 465 454 450
Sales 701 8.8 816 6.8 799 7.2
Expenditure, of which 583 6.4 655 4.8 646 3.3
  Raw Material 49 12.9 47 6.8 44 -13.6
  Staff Cost 50 11.9 55 8.0 56 8.4
  Power & fuel 40 3.4 31 -21.7 30 -25.9
Operating Profits (EBITDA) 129 28.3 164 16.4 157 19.4
Other Income 64 61.7 24 2.9 43 -33.3
Depreciation 60 6.4 68 6.6 69 11.2
Gross Profits (EBIT) 133 59.0 120 19.5 131 -2.2
Interest 45 -8.0 50 6.0 56 20.8
EBT (before NOP) 88 @* 70 31.5 75 -14.3
Tax Provision 17 -9.3 23 16.7 23 35.4
Net Profits 71 @* 48 6.6 47 -33.9

* The ratio / growth rate for which denominator is negative or negligible
is not calculated, and is indicated as '$' and '@' respectively.

The sales of companies operating in the services sector have risen by around 7.2% but net profit has fallen by 33.9%. This despite the fact that raw material cost as well as cost of power and fuel has crashed. Nevertheless, this did not prevent overall expenditure from going up. This again shows that companies operating in this sector are going through tough times and lack pricing power. The consumption has still not picked up despite the RBI cutting the repo rate by close to 125 basis points since the beginning of this year.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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5 Responses to "Corporate performance shows a clear trend of demand destruction"

Mohan Lal

Dec 11, 2015

Dear patron
I would request that for a person like me who would not be able to visit, please send whole proceedings.
Mohan Lal


Sudhir Mathur

Dec 7, 2015

In the manufacturing industries what is the contribution of crude oil processing companies? The fall in price of crude is dramatic and the volume is super high. This would indicate a fall in sales but a rise In profits. Similar to exports as a large quantity of crude is processed and exported..would show a drop in value of exports to neighbouring countries who import processed crude.



Dec 7, 2015

Dear Vivek

My view points are as follows

1. Service sector growth rate of 7.2% is akin to GDP Growth rate. This indicates that they enjoy good pricing power, since the volume growth is lower.
2. Services sector Operating Profit has gone up excellently by 19.4% due to lower input costs. It seems the same is not passed on to consumers. Hence demand is not picking up.
3. Services sector Net Profit is down due to higher depreciation and interest cost. This is due to higher inventory.
4. Manufacturing Sales is down but Operating Profit has gone up. It seems the lower input costs are not passed on to consumers. However, this implies that the Corporates have enormous pricing power akin to the Government.
5. Tax provisioning of Manufacturing does not sync with the higher indirect tax collection of the Government. ( Tax gone up from 131 to 137 which is about 4.5% only )
6. Overall corporate sales as well as value of production are down both in Q1 and Q2. Technically there is recession.
7. For overall corporate, tt seems the lower input costs are not passed on to consumers. However, this implies that the Corporates have enormous pricing power akin to the Government.
8. The philosophy is both Government and the corporate are in sync. Like Government dows not want to pass on the benefit of falling crude prices to consumers, the corporates also do not want to pass on the benefit of falling input costs to consumers.
9. Staff Cost in manufacturing is less that 6%. I doubt the job creation potential of this Sector.

Best Regards



Dec 7, 2015

Hi Sir,
All your insights are really of genius grade. I really feel something missed if I don't read your articles daily. Thanks a lot for you helping society learn. May god bless you with all health & happiness for years to come & beyond :)

With respect to above article,
is there slight error in math for Services Industry Net profits ?
EBT 75 - Provision for Tax 23 = 52 (instead of 47 shown above) ?


Pauls M I

Dec 7, 2015

Dear Vivek, I am a big fan of your articles. I eagerly wait to read the articles and you have a great sense to pick the right topics. Your analysis of real estate ( your favorite topic), pay commission, bad loans in banks, analysis of corporate results are to the point. You give the clear picture of situation instead of being a cheer boy for the statements made by various media houses/corp orates/politicians to create a hype/boost sentiments. Keep it up

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