However, with crude oil prices holding firm above US$80 per barrel and a third wave of covid-19 is weighing on local sentiments. Meanwhile, daily covid-19 cases in the country shot up above the 2,00,000-mark in the first week of January 2022 and hit a near seven-month high of 2.70 lakh as a surge continued in cases across major states.

The period before the pandemic, too, was quite a testing for the local economy and corporates. While the benchmark equity indices edged up despite of this drag on the economy, corporate sentiments were mostly tepid as the CII Business Confidence index fell to a multi-year low of 49.4 in Q3FY2020.

The economy was being supported by rising exports, sustained pick up in government spending and a decline in crude oil prices during the two fiscals prior to the emergence of the pandemic. This period also saw the government coming up with landmark decisions such as a cut in corporate tax rate and launch of a National Infrastructure Pipeline.

Five extremely important factors, with potentially a long-term impact on the domestic financial markets, shaped up the narrative for investors over last five years. In order of occurrence, these were demonetisation, GST, a decade-low GDP growth, covid-19 influenced contraction and stubborn inflation. There is a definite wisdom in focusing on a company's ability to increase its operational margins despite these diverse and singularly influential factors affecting the businesses at all levels in the economy.

The formal announcement of demonetization of high currency denomination notes of Rs 500 and Rs 1000 worth nearly 15.4 trillion, constituting about 87% of the currency in circulation, took place on November 8, 2016. Demonetisatoin hit the demand side of the economy hard as cash squeeze dented ability of households to spend. The very next year, a supply-side shock weighed on the economy in the initial period of the GST regime. The subsequent moderation in economic growth punctured household and corporate sentiments and the GDP growth tanked to an 11-year low of 4% in FY2020.

While this tepid performance, to an extent, was due to the onset of covid-19 in March 2020, the primary reason was the continuation of poor industrial activity and investment demand. The Economic Survey 2019-20 noted that the deceleration in GDP growth can be understood within the framework of a slowing cycle of growth, with the financial sector acting as a drag on the real sector.

On the demand side, the deceleration in GDP growth was also caused by a decline in the growth of real fixed investment in H1 of FY2020 when compared to FY2019, induced in part by a sluggish growth of real consumption. A weakening of global economic growth also played a part is keeping local expansion muted. The global economy grew at 2.3% in FY2019, the lowest in a decade.

Further affecting the economy were tepid trends in credit growth. The growth of bank credit, which was picking up in H1 of FY2019, started decelerating in H2 of FY2019 and further in H1 of FY2020. The deceleration was witnessed across all major segments of non-food credit, save personal loans which continued to grow at a steady and robust pace. The deceleration in credit growth was most in the services sector. Credit growth to industry also witnessed a significant decline both for MSME sector as well as large industries.

The RBI recently stated that bank credit growth continued to be driven by growth in personal loans, which accounted for 27.4% of total credit in September 2021 as compared with 25% one year ago and 19.3% five years ago. Industrial sector's demand for bank credit moderated during the covid-19 pandemic. Its share in outstanding credit declined to 28% in September 2021 from 29.9% a year ago. The private corporate sector's demand for bank credit continued to moderate and the credit share of the household sector has increased further. This in turn will bring focus back on long term players providing enough safety and stability to the investors.

Private final consumption expenditure, a measure of demand, is projected to rise 6.9% in FY2022 from a year ago, but was still 2.9% below the FY2020 level, indicating the severe impact of the pandemic on incomes. The growth in FY2022 is driven largely by government capital spending. It's seen increasing 7.6% while gross fixed capital formation, a measure of investment, is estimated to rise almost 15% in FY2022.

The share of private consumption in GDP is expected to moderate further to 54.8% in FY2022 from 56% in FY2021 and 57.1% in FY2020. While the per capita GDP is likely to rise, the per capita net national income in real terms is estimated to be Rs 1,06,975 crore in FY2022, lower than Rs 1,07,589 crore in FY20.

The reason why operationally sound and stable companies will be on the investor's radar in coming months is because, the third wave notwithstanding, the economy is showing signs of reverting to its long-term growth trend as revealed by the latest Gross Domestic Product (GDP) data.

India's GDP is estimated to grow at 9.2% in FY2022 as compared to a contraction of 7.3% during FY2021. Real GDP or GDP at Constant Prices (FY2012) is estimated at Rs 147.54 lakh crore, as against the Provisional Estimate of GDP of Rs 135.13 lakh crore, released on 31st May 2021.

The growth in real GDP during FY2022 is estimated at 9.2% as compared to the contraction of 7.3% in FY2021. Real Gross Value Added at Basic Prices is estimated at Rs 135.22 lakh crore in FY2022, as against Rs 124.53 lakh crore in FY2021, a growth of 8.6%. The per capita GDP is also likely to rise 8.1% to Rs 1,07,801.

The World Bank has noted that India's economic growth is expected to be 8.3% in the current financial year and 8.7% in FY2023. The 8.3% estimate for the current fiscal is the same as what was projected by the World Bank in its last projection released in October 2021 even as it cut the global economic growth forecast.

The global lender said that the Indian economy's growth rate in the current as well as the next fiscal will be stronger compared to its immediate geographic neighbors. The economy should benefit from the resumption of contact-intensive services and the ongoing but narrowing monetary and fiscal policy support. Sectors particularly sensitive to the pandemic remain below the pre-pandemic levels though.

To boost demand, FY2020 witnessed significant easing of monetary policy, with the repo rate having been cut by the Reserve Bank of India (RBI) by 110 basis points. Having duly recognized the financial stresses built up in the economy, the government has taken significant steps this year to speed up the insolvency resolution process under the Insolvency and Bankruptcy Code (IBC) and easing of credit, particularly for the stressed real estate and NBFC sectors.

Capital Market focused on counters that have recorded year on year increase in their operational profit margins (Profit Before Interest, Depreciation and Taxes Margin) over the last five fiscal years. In total, there are 39 companies with a market capitalization higher than Rs 500 crore qualifying to include in this list.

Most of these companies are established industry leaders. Only five of the counters have market capitalization less than Rs 1000 crore. This reflects that, even in testing times for the economy, which was going through a very tough phase even before the covid-19 pandemic, companies with large-scale market presence and an established moat were performing well operationally.

A company's operating profit is its total earnings from its core business functions for a given period, excluding the deduction of interest and taxes. It also excludes any profits earned from ancillary investments, such as earnings from other businesses that a company has a part interest in. An operating loss occurs when core business income ends up being lower than expenses.

Operating profit serves as a highly accurate indicator of a business's health because it removes all extraneous factors from the calculation. All expenses that are necessary to keep the business running are included in this measure.

Operating profit is dependent on many factors like the sales growth of the company, trends in demand for products or services, strategy for pricing, raw materials cost, and labor expenses. These factors are directly related to the day-to-day decisions. Therefore, operating margin is quite a precise measure of managerial prowess, ûexibility in operations and competency in the marketplace.

Performing well on a consistent basis in a challenging period spanning around half a decade will certainly help these companies boost their growth as the economy shifts to the next phase of expansion.

The State Bank of India, in its latest research update of Ecowrap, noted that Q3 of FY 2022 witnessed a visible expansion in credit growth across sectors. The incremental credit-deposit (CD) ratio beginning Q3 FY2022 was at 133 as against the incremental CD ratio of only 2 during H1 FY2022. Incremental deposits in the banking system have declined by Rs 2.2 lakh crore during this period, whereas credit growth has picked up by Rs 3.5 lakh crore.

The recent credit growth is visible across sectors. Sectors where demand for credit started picking up during the last three months include NBFCs, Telecom, Petroleum, Chemical, Electronics, Gems & Jewelry, and Infrastructure including Power and Roads. These are mostly having big ticket disbursements. Sectors such as Healthcare, Commercial Real Estate, Pharmaceuticals, Infrastructure, NBFCs, and Construction will be the beneficiaries of such credit off take.

While the covid-19 crisis has been under a lot of focus over the last couple of years for the market, the testing times before the pandemic seem to have disappeared for the domestic economy for now, given that the GST collections are trending upwards and credit growth is picking up.

Outlook

Most of these counters are up in a generous manner over last one year though a volatile spell seen in local stocks after October 2021 pulled some of them well below their recent highs. Some correction has also been observed in pharma companies in the list as Covid-19 abated in the second half of the last calendar year amid sustained increase in vaccinations. The top ten companies with highest Profits Before Interest Depreciation and Taxes margins in FY21 belong to a diverse set of sectors. These companies include Aptus Value Housing, HDFC AMC, Capri Global, Indiamart Intemesh, Supriya Life sciences, TAAL Enterprises, IRCTC, Sasken Technologies, Alkyl Amines and Ipca Labs. The broad list of 39 counters also includes some recently listed players which have managed to do impressively through the testing times before and through the pandemic. On the whole, the ability of this set of players to keep on improving operationally will likely place them on a firm footing as local consumption cycle kicks back in action along with economic growth.

The pandemic could yet pinch the economy even as it has mostly entered its last phase. This is because, despite of the rise in domestic credit growth, soaring crude oil prices and stubborn inflation might keep corporate earnings under check. An uncertain global economic outlook could weigh on the export driven corporate's revenue too.

What is tempering the mood is the likelihood volatility post Budget, outcome of the politically sensitive Uttar Pradesh state election and crude oil soaring further instead of cooling.

It is in these uncertain times that importance of companies whose financials have been recording consistent growth is realized.

Companies recording a constant improvement in operating margins over the last half a decade have largely been successful in dealing with a convergence of factors and have managed exceptionally well on the sales front too. This will likely trickle down on the stock prices in coming years as the world slowly moves back to normalcy.