India Inc’s Q3 earnings show that while the growth story is intact, it’s not quite setting the blistering pace it once did.
THE STOCK market is being hammered, thanks to fears of a US recession and a number of subprime skeletons tumbling out of the closet. For those hoping that third-quarter (Q3) FY08 results will bring some cheer to the flagging market, the performance of India Inc has not been too encouraging. This was expected, given that some of the major economic indicators such as GDP, industrial production and exports are slowing down. While there have been some outperformers in Q3, at an aggregate level, signs of a slowdown are definitely visible.
We analysed the results of 2,380 companies for the quarter ended December ’07 and found that net sales grew by 16.4% over December ’06, while the growth in bottomline was restricted to 16.1%. The fact that this is the lowest YoY growth rate in the past six consecutive quarters strengthens the overall concern that the growth has begun to peak out. This sample excludes banking and oil & gas companies, which distort the real picture due to their size and fluctuating incomes.
The disconcerting trend that was witnessed in the past two quarters — wherein other income grew at a faster clip than operating income — continued in Q3. Other income, which contributed just 22% to the net profit in the December ’06 quarter, accounts for over 34% of the same in the December ’07 quarter. There is a disproportionate rise in interest costs as well, and increased tax provisions have also played a prominent role in the erosion of growth in net profit. However, to its credit, India Inc as a whole has displayed great resilience in maintaining operating profit margins higher than year-ago levels despite a slowdown. The aggregate operating margin in Q3 FY08 was 19.2%, against 19% in the corresponding quarter of the previous year.
Our analysis also reveals that the slowdown is secular in that it cuts across sectors. However, the slowdown in growth of the cement sector is the most striking. The cement industry managed to clock a meagre 6.2% growth in net profit, compared to the whopping 216.1% profit growth in December ’06 quarter.
The other industries that have reported consistently falling growth figures include capital goods, entertainment & media, steel and pharmaceuticals. However, packaging, chemicals, fertilisers and automobiles bucked the trend, showing a higher growth in the December ’07 quarter, compared to December ’06. The packaging industry’s good show is largely attributable to the significantly improved numbers published by Jindal Poly Films, Max India and Cosmo Films. The net profit of the packaging industry spurted 104.5% during Q3 FY08, against a growth of 29.5% in the December ’06 quarter. However, it must be noted here that other income played a significant role in boosting the profit of Max India.
The chemicals industry also had an exciting quarter, recording 42% profit growth during the quarter vis-à-vis 21% in the year-ago period. The profit growth in this industry was led by India Glycols, Phillips Carbon Black, Pidilite, Aarti Industries, DCW, Bihar Caustic & Chemicals and Hikal, while leading companies such as Deepak Nitrite, Chemplast Sanmar, Atul and Nocil found the going tough.
The fertiliser industry has been another outperformer during this period, led by substantially better profits reported by Gujarat Narmada Valley Fertilisers (GNFC), Zuari Industries, Coromandel Fertilisers and Mangalore Chemicals, while other companies suffered. The aggregate profit of this industry grew by 26.3% in Q3 FY08, against 24.3% earlier. However, it must be noted that GNFC’s profits were boosted due to the merger of Narmada Chematur.
The auto industry posted 14.6% YoY growth in net profit in the December ’07 quarter, against 10.6% recorded in December ’06. But this was mainly on account of higher other income, rather than operating income. Sharp jumps in other incomes of Tata Motors, M&M, Ashok Leyland and Hindustan Motors boosted the industry’s performance.
Sectoral woes apart, our analysis reveals that while operating margins remained stable during the quarter, the industry’s profits were eroded by interest costs and tax provisions, which are heading northwards. India Inc’s interest costs, which were around 2.7% of its net sales in the December ’06 quarter, have gone up to 3.6% in Q3 FY08. While the rise in interest costs can be explained by an overall increase in the cost of borrowed funds, an increase in corporate indebtedness cannot be ruled out. The industries which have witnessed the steepest rise in interest cost as a percentage of net sales are telecom, shipping & logistics, FMCG, steel & alloys, entertainment & media, cement and sugar. A FEW industries such as power, consumer durables and textiles have reduced their interest burden in proportion to their net sales.When it comes to tax provision, analysis shows that there has been a steady rise in tax provisions as a percentage of net sales, from 3.6% in the December ’06 quarter to 4.1% in December ’07. The two main reasons for this are marginal rise in the effective rate of tax and higher other income boosting pre-tax profit.
The cement industry witnessed the highest spurt in tax provisions, which stood at 10.5% of its December ’07 net sales, up from 7% in December ’06 and just 2.6% in December ’05. Fertilisers & agrochemicals, power and plastic & rubber products were some of the other industries that witnessed a disproportionate rise in tax provisions. On the other hand, telecom & equipment, textiles and shipping & logistics registered a gradual decline in the same.
The proportion of depreciation to net sales has remained range-bound in the past at around 3.5%. This indicates that the rise in depreciation is in line with growth in net sales. A rise in overall depreciation indicates increasing capital expenditure by corporates and hence, growth in depreciation is heartening. With new investments taking place, industries such as cement, shipping & logistics, sugar and telecom & equipment have witnessed a steady growth in depreciation as a percentage to net sales. On the other hand, for industries such as power and steel & alloys — where the gestation period for new capacities being commissioned is typically several quarters — this figure is on a downward trend.
India Inc’s December ’07 quarterly results have brought forward strong evidence which reinforces the nagging worries of investors. The growth in corporate sales and net profit has further slowed down, and if one has to go by global economic indicators, the immediate future doesn’t appear very cheerful. At the same time, interest, depreciation and tax put together are now taking a larger toll of 11.2% of net sales, compared to around 9.8% in the year-ago period. And other income is providing support to the growth in bottomline. If one removes the effect of other income from the profitability analysis, India Inc’s net profit level appears even more worrisome.
However, all’s not lost. One good thing that has come out over the past few quarters is India Inc’s ability to maintain its operating margins. The other positive is that given the upsurge in capital expenditure the economy is witnessing, corporates are expanding capacities and several infrastructure projects are under way. Lastly, so far, domestic consumption continues to be strong and this is likely to support India’s growth going forward, even when export growth stagnates due to the economic slowdown in the US. However, we may have to wait for another couple of quarters to confirm this conclusion.
THE STOCK market is being hammered, thanks to fears of a US recession and a number of subprime skeletons tumbling out of the closet. For those hoping that third-quarter (Q3) FY08 results will bring some cheer to the flagging market, the performance of India Inc has not been too encouraging. This was expected, given that some of the major economic indicators such as GDP, industrial production and exports are slowing down. While there have been some outperformers in Q3, at an aggregate level, signs of a slowdown are definitely visible.
We analysed the results of 2,380 companies for the quarter ended December ’07 and found that net sales grew by 16.4% over December ’06, while the growth in bottomline was restricted to 16.1%. The fact that this is the lowest YoY growth rate in the past six consecutive quarters strengthens the overall concern that the growth has begun to peak out. This sample excludes banking and oil & gas companies, which distort the real picture due to their size and fluctuating incomes.
The disconcerting trend that was witnessed in the past two quarters — wherein other income grew at a faster clip than operating income — continued in Q3. Other income, which contributed just 22% to the net profit in the December ’06 quarter, accounts for over 34% of the same in the December ’07 quarter. There is a disproportionate rise in interest costs as well, and increased tax provisions have also played a prominent role in the erosion of growth in net profit. However, to its credit, India Inc as a whole has displayed great resilience in maintaining operating profit margins higher than year-ago levels despite a slowdown. The aggregate operating margin in Q3 FY08 was 19.2%, against 19% in the corresponding quarter of the previous year.
Our analysis also reveals that the slowdown is secular in that it cuts across sectors. However, the slowdown in growth of the cement sector is the most striking. The cement industry managed to clock a meagre 6.2% growth in net profit, compared to the whopping 216.1% profit growth in December ’06 quarter.
The other industries that have reported consistently falling growth figures include capital goods, entertainment & media, steel and pharmaceuticals. However, packaging, chemicals, fertilisers and automobiles bucked the trend, showing a higher growth in the December ’07 quarter, compared to December ’06. The packaging industry’s good show is largely attributable to the significantly improved numbers published by Jindal Poly Films, Max India and Cosmo Films. The net profit of the packaging industry spurted 104.5% during Q3 FY08, against a growth of 29.5% in the December ’06 quarter. However, it must be noted here that other income played a significant role in boosting the profit of Max India.
The chemicals industry also had an exciting quarter, recording 42% profit growth during the quarter vis-à-vis 21% in the year-ago period. The profit growth in this industry was led by India Glycols, Phillips Carbon Black, Pidilite, Aarti Industries, DCW, Bihar Caustic & Chemicals and Hikal, while leading companies such as Deepak Nitrite, Chemplast Sanmar, Atul and Nocil found the going tough.
The fertiliser industry has been another outperformer during this period, led by substantially better profits reported by Gujarat Narmada Valley Fertilisers (GNFC), Zuari Industries, Coromandel Fertilisers and Mangalore Chemicals, while other companies suffered. The aggregate profit of this industry grew by 26.3% in Q3 FY08, against 24.3% earlier. However, it must be noted that GNFC’s profits were boosted due to the merger of Narmada Chematur.
The auto industry posted 14.6% YoY growth in net profit in the December ’07 quarter, against 10.6% recorded in December ’06. But this was mainly on account of higher other income, rather than operating income. Sharp jumps in other incomes of Tata Motors, M&M, Ashok Leyland and Hindustan Motors boosted the industry’s performance.
Sectoral woes apart, our analysis reveals that while operating margins remained stable during the quarter, the industry’s profits were eroded by interest costs and tax provisions, which are heading northwards. India Inc’s interest costs, which were around 2.7% of its net sales in the December ’06 quarter, have gone up to 3.6% in Q3 FY08. While the rise in interest costs can be explained by an overall increase in the cost of borrowed funds, an increase in corporate indebtedness cannot be ruled out. The industries which have witnessed the steepest rise in interest cost as a percentage of net sales are telecom, shipping & logistics, FMCG, steel & alloys, entertainment & media, cement and sugar. A FEW industries such as power, consumer durables and textiles have reduced their interest burden in proportion to their net sales.When it comes to tax provision, analysis shows that there has been a steady rise in tax provisions as a percentage of net sales, from 3.6% in the December ’06 quarter to 4.1% in December ’07. The two main reasons for this are marginal rise in the effective rate of tax and higher other income boosting pre-tax profit.
The cement industry witnessed the highest spurt in tax provisions, which stood at 10.5% of its December ’07 net sales, up from 7% in December ’06 and just 2.6% in December ’05. Fertilisers & agrochemicals, power and plastic & rubber products were some of the other industries that witnessed a disproportionate rise in tax provisions. On the other hand, telecom & equipment, textiles and shipping & logistics registered a gradual decline in the same.
The proportion of depreciation to net sales has remained range-bound in the past at around 3.5%. This indicates that the rise in depreciation is in line with growth in net sales. A rise in overall depreciation indicates increasing capital expenditure by corporates and hence, growth in depreciation is heartening. With new investments taking place, industries such as cement, shipping & logistics, sugar and telecom & equipment have witnessed a steady growth in depreciation as a percentage to net sales. On the other hand, for industries such as power and steel & alloys — where the gestation period for new capacities being commissioned is typically several quarters — this figure is on a downward trend.
India Inc’s December ’07 quarterly results have brought forward strong evidence which reinforces the nagging worries of investors. The growth in corporate sales and net profit has further slowed down, and if one has to go by global economic indicators, the immediate future doesn’t appear very cheerful. At the same time, interest, depreciation and tax put together are now taking a larger toll of 11.2% of net sales, compared to around 9.8% in the year-ago period. And other income is providing support to the growth in bottomline. If one removes the effect of other income from the profitability analysis, India Inc’s net profit level appears even more worrisome.
However, all’s not lost. One good thing that has come out over the past few quarters is India Inc’s ability to maintain its operating margins. The other positive is that given the upsurge in capital expenditure the economy is witnessing, corporates are expanding capacities and several infrastructure projects are under way. Lastly, so far, domestic consumption continues to be strong and this is likely to support India’s growth going forward, even when export growth stagnates due to the economic slowdown in the US. However, we may have to wait for another couple of quarters to confirm this conclusion.
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