Corporates double down on large scale cost-cutting in second quarter

NEW DELHI: India Inc continued to effect large scale reductions in costs and expenses over the second quarter of the current financial year (Q2 FY21) in an effort to mitigate the effects of a contraction in revenues. An analysis of the financial results for the quarter for 179 companies shows an average 7 per cent year-on-year decline in revenues, but a comfortable 9 per cent increase in EBITDA margins — a key measure of profitability. In fact, 34 companies in the Nifty 50 index improved their EBITDA margin.  

According to a report by Motilal Oswal Financial Securities examining the data, a defining feature of the better-than-expected performance during the quarter was an enhanced focus on cost mitigation measures. “Q2FY21 was an optimum combination of gross margin expansion and operating cost reduction,” research analysts Gautam Duggad, Deven Mistry, and Jayant Parasramka wrote. 

The analysis shows that driven by a reduction of 11 per cent year-on-year in operating costs, all key sectors (barring Capital Goods and Utilities) reported an operating margin expansion. “Other expenses

declined 8 per cent y-o-y, pointing toward continued cost control initiatives by companies,” it noted. 
Slashing wages or effecting retrenchments weren’t the go-to method for cost-cutting for most sectors, with overall staff costs rising a modest 4 per cent year-on-year.

However, the report indicates that some derived significant benefit from such measures-staff costs  decreased by 21 per cent for Media, 20 per cent Retail, 5 per cent Cement, and 5 per cent for Metals during the quarter. Combined with this paring down of costs with a sequential demand recovery-consumption still remains lower than pre-Covid levels-most sectors recorded good numbers for the quarter.

According to MOFSL, net profits grew 16.5 per cent y-o-y on average during the period, driven by “better-than-expected demand recovery as well as continued cost rationalization across sectors”. Some sectors did particularly well. Earnings before taxes grew sharply for Metals (199%), Cement (66%), PSU Banks (44%), Utilities (27%), Life Insurance (27%), Technology (12%), and O&G (12%). However, others did not, with Retail (-88%), Media (- 53%), Infrastructure (-45%), and Automobiles (-15%) recording double-digit declines.