Explained: How Sluggish Industrial Growth Impacted Corporate Profit, Pulled Down GDP Growth

India's GDP growth slumped in Q2, reaching a two-year low, primarily due to weak performance in the industrial and manufacturing sectors, writes Krishnanand.

New Delhi:A surprise and steep plunge in India’s GDP growth numbers during the second quarter of the current financial year has also highlighted the sluggish performance of the country’s industrial sector during this period as it was manufacturing sector dragged down the country’s economic growth rate to nearly two years low.

Data analysed by the SBI Research showed that in terms of absolute numbers, the incremental growth in industry comes to merely Rs 42,515 crore in the second quarter of the current financial year over the corresponding period of the last fiscal when it registered a year-on-year growth of Rs 1.4 lakh crore.

It indicated a hit of almost Rs 1 lakh crore in incremental terms in the overall industrial output in the second quarter.
An analysis of 4,000 listed companies showed that they reported revenue growth of only 6.13 per cent while EBITDA and profit after tax (PAT) growth of around 7 per cent and 9.4 per cent respectively in the second quarter of this fiscal as against the corresponding period of the previous fiscal year.

Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA), is an alternate measure of profitability to the net income of a company. EBITDA is used to assess a company's profitability and financial performance. If one excludes nearly a thousand listed companies in the Banking, Financial Services and Insurance (BFSI) sector then more than 3,000 listed corporate entities reported revenue and PAT growth of 3.9 per cent and 6 per cent respectively in the second quarter this year as against the growth recorded during the same period of last fiscal.

Moreover, ex-BFSI, corporates reported negative EBITDA growth of around 1.5 per cent in July-September period this year as against a growth of 41 per cent witnessed during the same period of FY 2023-24.

What sectors reported negative EBITDA growth?

As per the data analysed by SBI Research, major sectors that contributed to the negative growth of 1.5 per cent in EBITDA in the second quarter included the refining sector, cement, power generation and distribution, paints and varnish companies, tyre companies, air transport, paper, textile companies among others.

According to SBI Research, overall EBITDA margins also declined by 79 basis points, from 15.19 per cent in the second quarter of the last fiscal to 14.40 per cent in the second quarter of this fiscal.

“While taking a deep dive into the numbers, we noted major sectors i.e. automobile, cement, power generation and distribution, tyres etc. reporting lower to negative EBITDA growth in the second quarter this fiscal as compared to impressive double-digit growth in the second quarter of FY 2023-24, while the employee expenses continue to grow positively except in case of refineries, which could be the main dragger to the overall GDP growth numbers,” Soumya Kanti Ghosh, Group Chief Economic Advisor of State Bank of India said in a statement sent to ETV Bharat.

Ghosh noted that corporate GVA, as measured by EBITDA plus employee expenses also recorded growth of just 6.64 per cent in the second quarter of this fiscal as against a massive growth of around 47 per cent during the same period last year.

According to Soumya Kanti Ghosh, corporate performance in the second quarter of this fiscal seems to be largely driven by weak performance in commodity-oriented sectors, slowing consumption, and moderation in domestic cyclical sectors like the automobile sector which too reported marginal growth of 4 per cent in the EBITDA as compared to whooping 55 per cent growth last year which was primarily driven by the low input cost and improved realization backed by a strong demand.

For example, refining companies reported negative EBITDA growth in the second quarter due to higher expenses and weak refining margins. Secondly, the cost of raw materials consumed or the input cost increased by around 5 per cent i.e. from 54.9 per cent in the second quarter of the last fiscal to around 60 per cent during the same period this year.

Similarly in the Cement sector also, the total input expenditure including raw material cost increased by around 5 per cent in the second quarter of this fiscal as compared to the same quarter of the previous fiscal year. This increase in raw-material cost coupled with continuous price drops put pressure on the margins of cement companies.

Sluggish credit growth impacted GDP growth!

Ghosh also highlighted the moderation in credit growth during this period. He says, that in the credit market, Non-Banking Finance Companies (NBFCs), including Micro Finance Institutions (MFIs), have drawn regulatory attention on account of exorbitant interest rates charged to their customers.

“Additionally, many banks are experiencing stress in small ticket advances, credit cards and personal loans. More generally, banks have circumspectly reined in lending to retail and services,” noted the economist.

Moreover, the sector-wise incremental credit growth for last month this year (October 2024), indicates that credit growth has slowed down across the sectors.

For example, the agriculture and allied sector year-to-date (YTD) credit growth declined to 6.5 per cent, last year it was 10.6 per cent. Similarly, credit to industry growth declined to 3.3 per cent against 3.9 per cent last year and credit to services sector declined to 4.2 per cent against 14.2 per cent last year while credit growth in the personal loan segment declined to 5.9 per cent, it was 19.6 per cent last year.

Ghosh says there is a relation between credit growth and the slowdown in GDP as a slowing credit growth also pulled down GDP growth in the second quarter.