Covid division: MSMEs strike while big cos profit from low rates
July 8, 2021 3:30:11 a.m.
Business operating profitability increased during the 2020-21 pandemic year, reversing the declining profit trend of the previous two years, although the impact on profitability and debt repayment capacity has varied according to the size of the companies. Last year, large companies made good use of low interest rates, labor costs and raw materials to boost their operating profits. While large companies have strengthened their balance sheets, MSMEs have suffered a decline in their financial performance.
In the three quarters of 2020-2021 combined, the business sector revenue and expenses decreased by 11.6% and 15.2%, respectively, while operating profit (earnings before interest and taxes or EBIT ) grew 7% year-on-year, according to a recent assessment by the Reserve Bank of India. The impact of Covid-19 has been varied for businesses of different sizes / types of operations.
“Evidence from advanced and emerging economies shows that smaller companies are relatively more vulnerable to extended foreclosure periods. Large businesses may have found it easier to cut costs compared to small businesses during foreclosure. In India, although the Interest Coverage Ratio (ICR) deteriorated for companies of all size categories in 2020-21, small businesses appear to have been more affected by the foreclosure in the first quarter of 2020-21, ” the RBI noted in its analysis of the company. profitability and debt servicing capacity.
However, businesses large and small improved their debt service ratios in the third quarter to higher levels than in the pre-pandemic period. Rising profits and a sharp drop in borrowing costs led to a recovery in their interest coverage rate. Industrial sectors that depend on discretionary consumer spending have been hit the hardest (such as hotels, leisure services, gems and jewelry). Sectors that were excluded from foreclosure (like food and utilities) saw relatively smaller deterioration in the interest coverage ratio in the first quarter of FY21.
After the sharp decline in sales and profitability in the first quarter of FY21 following last year’s nationwide foreclosure, companies continued their cost-cutting strategies in subsequent quarters. Falling interest rates, low wages and other input costs, as well as resuming sales, allowed Indian companies to turn around operating profits and balance sheets in subsequent quarters over the course of the year. Previous exercice.
In the first quarter of fiscal 21, the average sales turnover contracted by 32% for a sample of 2,536 listed companies. The companies resorted to aggressive cost cutting measures, which allowed them to reduce their total expenses by 34%. Profits plunged, putting their debt servicing capacity at risk. Indian companies, however, have quickly adapted to the changed business environment. As sales recovered in the second quarter of FY21, cost reduction continued as the preferred route to regain efficiency and return to profitability, the RBI said.
While the revenue contraction moderated to 5.3%, total expenses contracted 12.5%, allowing net operating income to rise 33.4% in the second quarter. However, in the third quarter, revenue increased 2.0 percent and expenses increased 0.3 percent, resulting in a further increase in profits of 35.6 percent. Higher profitability in the third and fourth quarters helped improve the debt service capacity of businesses.