Fireworks to continue...

India Inc may have reported a slower rate of growth during the September ’07 quarter. However, the future doesn’t seem to be that gloomy

THE Indian bourses are vying for altitudes which many of us may not have even dreamt of, thanks mostly to the enthusiasm of foreign funds, which have been pouring money into the Indian equity market. Global investors are gung ho about India’s growth potential, given the robust estimates of GDP growth. Given this, it is a worthwhile exercise to track the quarterly performance of the Indian industry, which forms a major chunk of GDP if we combine the share of manufacturing and services.
Revenue and profit growth are tapering off since the March ’07 quarter and picture was no different in the September quarter. The latest aggregate results strengthen our view that the corporate growth has peaked. Both in incremental as well as percentage terms, corporate India is witnessing a gradual pullback. In the September ’07 quarter, aggregate sales of 1,747 listed companies that declared results rose by 17% and net profit grew by 22%. This was lesser than the corresponding figures of 31% and 54% during the September ’06 quarter. The oil companies and banks do not form a part of this sample, as given their size and volatility in earnings, the real picture could get distorted.
Sales growth is on a continuous decline over the last four quarters and during the September ’07 quarter it was the lowest when compared with any of the quarters since the December ’05 quarter. The slowdown may appear to be a result of a higher base effect as the year-ago growth rate was very high. To know the facts, we studied the incremental change (year-on-year difference between absolute numbers) in the aggregate topline and bottomline.
On an incremental basis, topline shows signs of fatigue. In the September ’07 quarter, nearly half of the companies reported a higher incremental jump in sales reckoned year on year. In the corresponding quarter of the previous year, roughly two-thirds of the companies were able to do so.
The growth rates in operating and net profits are also on a downward trend since last year. The rate of growth in operating profit has come down to 18.4% during the second quarter of the current fiscal from 42% in the September ’06 quarter. By similar comparison, net profit growth has tapered from 54.2% to 21.9%. On an incremental basis, however, corporate India is still able to keep up the tempo as half of the companies reported absolute year-onyear rise in net profit, similar to the yearago quarter. The slower growth in sales and profits can be attributed to sluggish performance by majority of companies in the sectors including automobile, cement, IT, metals and textiles.
Operating margin weakened slightly from 18.8% in the year-ago quarter to 18.6% in the September ’07 quarter. Companies that witnessed a contraction in the margins were from various sectors such as sugar, textiles, non-ferrous metals, auto ancillaries, pharmaceuticals, dyestuff, and leather chemicals.
Other income continued to gallop and grew over 72% during the September ’07 quarter. This was mainly on account of the unrealised foreign exchange gains arising out of foreign currency borrowings. This notional other income boosted net profit, which grew 22% on a y-o-y basis despite rising interest and depreciation costs. Net margin expanded by 50 basis points to 12.3%. Do the second quarter results hint at the possibility of a slowdown in the future performance of Corporate India? The analysis of the quarterly results won’t be complete without answering this question.
Presently, the growth rates are indeed
slowing down. However, we at ETIG believe that this is just a temporary phase – a so called ‘inflexion point’ – before the next phase of high-speed growth sets in. Corporate India is sitting on a huge work-inprogress as a number of capacity expansion projects are under way in almost all the industries, particularly in petroleum refining, cement, steel, and automobiles. At the same time huge investments are lined up for building the infrastructure in areas such as petroleum exploration and production, power generation and electrical equipments, construction, heavy engineering and similar industries. As these capacities come online, they will provide the impetus for Corporate India to take the next big leap. The aggregate y-o-y growth rates may decelerate marginally during the second half of FY ’08, but the same are expected to pick up with the start of FY ’09.
Further, some of the sectors continue to post robust performance. Capital goods and power generation companies reported improvements in operating profit margins during the quarter ended September ’07. Entertainment and electronic media – a relatively smaller industry considering the number of listed players – put up an impressive show led by the excellent performance of the industry leader Zee Entertainment.
The future appears to hold some challenges of global nature for Corporate India and wading through these may prove to be a daunting task. The US dollar is weakening steadily and India may witness a sustained rise in the rupee over the next few quarters. This will dent profitability of exporters. Global crude oil prices have crossed $95 per barrel levels and may soon touch $100 per barrel. Though the price regulation in the domestic market will keep the rise in fuel prices under check, impact of a higher energy price is expected to percolate through an increase in prices of crude oil-based commodities. It appears that the way ahead is rather tough at least in the immediate future. However, the things are likely to improve in FY ’09. Particularly, industries such as oil and gas, infrastructure, capital goods, telecom and power generation appear to hold a promising future ahead. There will be outperformers in other sectors also. However, they will have to be thoroughly researched.