Corporate India’s profits rise, but not due to demand



RBI compiled data on corporate results of non-financial, private sector firms for Q3, 2016-17 reveals a sharp rise in growth in net profits by 24.6%. This is a significant jump from the already double digit increase in net profits in comparable periods -Q3, 2015-16 and Q2, 2016-17 - of around 16% each.
As we try to dig into the answer to why the spike occurred, a possible increase in demand conditions seems like the plausible explanation. Sales growth remains limited at 2.8% in Q3, 2016-17, but has (i) picked up pace from the previous quarter, when it grew at 1.9% and (ii) has turned around from a 3.4%  increase during the corresponding quarter of the previous year. However, this explanation begins to lose merit when we glance at the far sharper 5% growth in expenditure, which has shown an appreciable upturn from the 1.3% growth seen during the previous quarter and has turned positive after declining by 6% from Q3, 2015-16. 


The fact that demand upturn is in fact, not the reason for the increase in net profits’ growth is corroborated by the slowdown in operating profits’ growth to 7.6% from 9.9% during the corresponding quarter of the previous year, even though there has been some improvement from the 5.5% increase seen during the previous quarter. Further, gross profits repeat the same story with different numbers. Gross profits grew by 8.4% in Q3, 2016-17, down from 8.9% during the same quarter last year and up from 6.2% during the previous quarter.
Further, the jump in net profits is despite a sharp increase in tax provisioning to the tune of 24.1%, over double the growth seen during the previous quarter and an even higher increase from the 4% decline in the corresponding quarter of the previous year. On account of lack of any more details on consolidated corporate numbers, we are unable to get to any more details that explain the increase in net profits growth, but what we do know it is not  on account of straightforward revenue and cost differentials.

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