Going by the CSO data, it would appear India’s manufacturing sector is galloping at close to 13%; the numbers from the corporate sector, however, tell a different story altogether, in which most firms aren't sprinting but crawling.
Going by the CSO data, it would appear India’s manufacturing sector is galloping at close to 13%; the numbers from the corporate sector, however, tell a different story altogether, in which most firms aren’t sprinting but crawling. In aggregate, the Ebitda — which is what the CSO (Central Statistics Organisation) seems to be tracking — for a universe of 1,400 companies (mining and manufacturing) has risen barely 5.3% y-o-y to R1,04,577 crore in Q3FY16. Of this, the profits of five oil marketing companies account for close to R10,500 crore; in Q3FY15, they reported a loss of R3,682 crore. Also, Reliance Industries accounts for another R11,000 crore, so together that’s roughly 20% or a fifth of the profits.
In contrast, JSW Steel and SAIL reported a collective operating loss of R22,612 crore, while BHEL reported an operating loss of R1,639 crore. Indeed, much of corporate India is in trouble. At Jindal Steel and Power, for instance, Ebitda has dropped 63% y-o-y from R1,556 crore, at Vedanta it has fallen by 49% to R3,106 crore and at Larsen Toubro by 8% to R2,650 crore. Smaller firms too have fared poorly. At Tata Chemicals, for instance, Ebitda has come off by 16.5% y-o-y, while at Cipla the fall has been 18% y-o-y.
Even if aggregate Ebitda has increased, there is little to cheer because this is the result of enormous savings from the lower cost of inputs — raw material costs fell 19% y-o-y for the sample while the ratio of raw materials to sales fell by more than 600 basis points. Lower pet coke prices reduced power & fuel cost by 10% y-o-y for a clutch of cement companies helping them post higher operating profits.
What has also boosted gross value addition is the rise in employee costs, which for the sample, has increased by 8% year-on-year. Consequently, the sum of the Ebitda and employee costs — or GVA — has risen 6.3%.
Ideally, it’s higher revenues that should be driving operating profits. But revenues have dropped 10.5% year-on-year in Q3FY16, for the same sample restricting the rise in Ebitda. While lower corporate revenues are largely the result of falling commodity prices, volumes for a host of manufacturers have barely grown. At cement maker ACC, they rose just 3% in CY2015 and at Tata Steel, they were lower. In the consumer staples space, they have grown in single digits for nearly three quarters now; Colgate’s volumes rose just 1%.
The GVA data is consistent over the last four quarters quarters — 6.6%, 7.3%, 9% and 12.6%. But the trend in the corporate sector is uneven. In Q2FY16, the sum of the Ebitda and wages actually fell 11% after a rise of 9.9% in Q1FY16 while in Q4FY15 it had contracted 22% y-o-y. As economists at JP Morgan have pointed out, the 12.6% rise in manufacturing in Q3FY16, reported by the CSO, would imply that value-added growth from corporate filings needs to be tracking nearly 17% in real terms. But that is completely at odds with the results.