‘Don’t See a Turnaround in Sept Quarter Bounce’

Operating profit margin of cos improves 16.3%, but experts say macro-economic trends don’t signal a positive trend

    India Inc’s results for the September 2012 quarter have so far been refreshingly better than the stagnating past couple of quarters, a fact that’s reflected in the stock market with benchmark indices gaining 9% in the past two months. And, experts believe that the real turnaround is yet to come.
An ET analysis of 861 listed companies that have published results for the September 2012 quarter, excluding banking and finance companies, reveals that the aggregate operating profit margin has improved to 16.3%, which was the best since September 2011 quarter.
The interest cost of the industry, which was growing at 25% to 50% year-on-year for the past six quarters, rose just 7% in the September 2012 quarter. What’s even more heartening is that for the first time in the past three years, interest cost declined on a sequential basis — the interest burden of all companies put together was at . 10,158 crore, 13% lower from the June 2012 quarter. This resulted in a 29.8% growth in the aggregate net profit to . 48,444 crore, which appears significantly better when juxtaposed against the anaemic growth numbers of the past four quarters.
However, experts are not entirely convinced by these numbers, at least not yet. “Macro economic numbers are not yet signaling a positive trend. We see cost cutting, project delays and postponements in fund raising by corporates on a large scale. We need to wait for another 1-2 quarters before knowing for sure if a turnaround is under way,” said Nilesh Karani, head of research with Magnum Equity Broking.
Sandeep Randery, head of research with BRICS Securities, shares the same view. “It would be premature to call it a turnaround at this juncture. An improvement in the incoming data like auto sales, bank credit growth, etc., would be needed to argue that a turnaround is under way.” If it’s not a turnaround and if the macro-economic indicators are still indicating a slowdown, then what has driven India Inc’s performance this quarter?
The answer apparently lies in appreciation of the rupee through the September quarter. Unlike preceding quarters when the rapidly depreciating rupee would result in forex losses, the currency’s appreciation this quarter has helped companies reduce their other expenses, which is reflecting in improved operating margins.
On the other hand, the data shows that key operating costs like raw material, staff cost, power etc., have not contributed to the improvement in the operating profit margin. In fact, staff cost, at 9.1% of net sales, was the highest in the past three years. Another worrying trend is that the year-on-year growth in net sales at 12.7% has dipped to a level not seen in the past two years. This analysis supports the experts’ opinion that a sustainable turnaround is yet to come. One may argue that even if the rupee goes back to 51-52 levels, India Inc would still be able to turn in another robust performance in spite of its problems. However, for the rupee to sustain at a higher level, the macro-economic indicators will have to improve first. So, investors shouldn’t read too much into India Inc’s performance for the September quarter.