‘Remarkably Low Operating Leverage’ In BSE 500 Firms Too: Credit Suisse

Operating profit of mid-sized Indian entities, particularly with a market capitalisation of $2.5-5 billion (Rs 18,500-37,000 crore), fell the most among the nation’s top 500 listed companies in the quarter ended June on account of their sector mix, according to Credit Suisse AG.

The earnings before interest and tax for large (more than $5-billion market cap), mid-sized ($1-5 billion) and small firms (less than $1 billion) declined 20%, 44% and 31% year-on-year, respectively, during the period, the global research firm said in a report. The EBIT decline for the $2.5-5-billion cohort was 59%.

Sales of the $2.5-5-billion market cap cohort dropped the most, compared with the near identical decline of 30% for the entire set.

That, according to Credit Suisse, is because this category comprises more of firms from auto and other discretionary sectors, and less of information technology, banks and staples.

Within sectors, the large, mid-sized and small firms did not show meaningful differences in sales, other than in banks and non-bank financial companies, where smaller firms have their own idiosyncrasies, the report said. “While Ebitda growth (PBT for financial firms) showed more variation, there was no noticeably different operating leverage between large, mid-sized and small firms, except in autos.”

Autos and discretionary, according to the report, witnessed the steepest decline in staff costs. And except for the financial firms, there was not much difference between trends within a sector.

Having observed a remarkably low operating leverage among BSE 100 firms, which indicated a prolonged demand slowdown, Credit Suisse expanded its set, aggregating results of 402 of the BSE 500 firms reported so far. This set saw earnings fall less than sales. Their fixed costs of staff, depreciation and interest rose year-on-year, and cost of goods sold fell far more than sales, indicating a low operating leverage.

“While fixed costs increased year-on-year, the Rs 4 lakh crore fall in cost of goods sold was the most important reason why the Rs 4.5-lakh-crore fall in sales did not result in a steep decline in profits,” Credit Suisse said.

Also Read: BSE 100 Q1 Results Signal Prolonged Demand Slowdown: Credit Suisse

Sales of BSE 500 companies account for about 18% of the country’s gross value of output but these firms are just 2.5% of the workforce directly, the report said.

“That the cost of goods for these firms fell much more than their sales means the losses were worse for their suppliers,” it said. “The ability of the firms to preserve their risk capital (retained earnings) is important for future potential growth of the economy, but if demand resets sharply lower, without a substantial stimulus the outlook for growth becomes bleaker.”