FY21 Earnings Report Card: Capital investment cycle likely to start from FY 2022-23

Utsav Mehta, Edelweiss Asset Management

The corona epidemic has come as a problem for Indian companies, but it has also proved to be good for companies in many cases. Indian companies are currently in a better position than in March 2020 even amid the lockdown, supply and raw material storage constraints and a sharp drop in demand.

More than 500 companies included in NSE500 have released their FY21 results. The margins, cash generation and leverage of these companies have shown significant improvement during this period. After several years of decline, RoEs have seen double digit growth.

In a work from home year, when the country’s economy saw a contraction of more than 7 percent, it is a surprise in itself. Both the desire to overcome the crisis and expert disaster management contributed to this achievement.

Some companies emerged during this period that used the pandemic as an opportunity to strengthen their distribution network, increase market share, improve their pricing power, reduce interest costs and cut non-essential expenses. .

In a year when there has been a decline of 3 per cent in nominal GDP, then the earnings of these companies have also declined by 6 per cent. It would seem that what is special about it? The gross margin of these companies has seen an increase of 5 per cent on a yearly basis. Which indicates an increase in their pricing power and market share.

A careful analysis shows that during this period, companies in the organized sector have been successful in snatching away shares from the unorganized companies. This is a change that was awaited since demonetisation, implementation of GST and reduction in corporate tax.

Apart from this, during this period of Corona period, there has been a spectacular increase of 19 percent in EBITDA of companies. In this situation, low interest rates have acted as a icing on the gold. Due to which the profits of companies have seen an increase of 31 percent during FY 2021.

Along with this, there has been a strong increase in cash flow in the balance seat of companies during this period. The free cash flow margin appears to be at the highest level in its immediate history. Apart from this, margins are also showing strength. Companies have used this cash to reduce their debt. Due to which the debt-equity ratio of companies is at the lowest level in its history.

Companies are using the cash available with them to reduce debt. Not only India Inc. but also the banks suffering from NPA are getting the benefit. However, the financial years 22 and 23 will prove to be better for testing the health of companies. From this period, we may see the beginning of the much-awaited capital investment cycle in the economy, which will see the growth wheel moving forward.

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