India Inc’s Q4 net profit takes a 22{bce2ac57dae147ae13b811f47f24d80c66c6ab504b39dda4a9b6e8ac93725942} hit due to Covid-19, says ICRA

Financials of Indian companies saw sharp decline in the March quarter both on a sequential and year on year basis due to the Covid-19 pandemic. An results analysis of 184 companies, excluding financial sector entities, indicates a 22 per cent fall y-o-y in net profit in the March quarter. The March quarter performance also dented the FY20 bottomline, which fell by 12 per cent over the year ago quarter.

While aggregate revenues were down 2.9 per cent y-o-y, the impact on margins was higher. While margins contracted by 30 basis points on y-o-y basis, they fell a sharper 120 basis points on a sequential basis to 16.8 per cent. Profitability was impacted adversely due to the subdued demand, tepid realisations in commodity sectors, and negative operating leverage. Pre tax profit margins fell to multi-quarter lows of 7.1 per cent. The impact of the lockdown is expected to be even more pronounced in the June quarter.

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Commenting on India Inc’s performance, Shamsher Dewan, Vice President – Corporate Sector Ratings, said the the Q4 results were significantly impacted by consumer and commodity-linked sectors. Despite some uptick in the initial months of the last quarter, major consumer-oriented sectors such as FMCG, consumer durables, auto OEMs and ancillaries, reported either a decline or marginal growth in sales volumes, weighed down by subdued consumer sentiments and increased wariness.

Tepid realisations driven by softening commodity prices (in line with global trends), coupled with subdued volumes in light of the pandemic outbreak and macroeconomic slowdown, resulted in revenue contraction for major commodity sectors, including oil & gas entities, metals & mining and iron & steel, said Dewan.

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The study indicated the weakening of the interest coverage ratio to 3 times in Q4, FY20 from 3.5 times in the December quarter and 3.6 times in Q4, FY19 due to fall in earnings. Interest costs increased by 13 per cent the year ago period on account of higher debt levels and Ind AS 116 accounting adjustments related to lease rentals. Sectors like airlines, telecom and construction saw significant increase in interest costs on a Y-o-Y basis on account of the same. At the same time, EBITDA contracted due to negative operating leverage. Interest cover in select stressed sectors like power and real estate slipped below 1 time, highlighting serious credit concerns.

The priority for India Inc, according to Dewan would be on managing liquidity, cutting costs and improving digital infrastructure, wherever possible. “Pay reduction, employee rationalisation and renegotiating on vendor agreements like lease rentals has already been effected by many corporates. However, despite these efforts, credit implications of the pandemic will remain significant for many entities,” he said.

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