Hard knocks for India Inc

Sales grow 5.3% in third quarter; profit just 1.9%; margins continue to contract

India Inc had flattered only to deceive. After the early birds posted sterling numbers, it has been a story of continued deceleration in corporate earnings.

The core revenues of 1,944 companies that have declared their results so far expanded just 5.3 per cent on a year-on-year basis during the December 2012 quarter, the lowest rate in three years. The same set of companies had recorded 8.2 per cent year-on-year growth in the previous quarter. This is the second straight quarter in which India Inc’s revenues have grown at a slower pace than the inflation rate — a clear indication the economic slowdown is proving to be worse than various projections.

Corporate profitability was not great, either. Net profit (excluding extraordinary gains and losses) was almost flat, growing 1.9 per cent year-on-year, while operating profit (Ebitda) increased just 8.9 per cent. This is much lower than the preceding quarter but better than the corresponding numbers in the same quarter last year.

The sample excludes all banks, non-banking finance companies and public-sector oil & gas firms. It accounts for 63 per cent of the combined market capitalisation of all BSE-listed companies.

The universe of 2,314 firms reported core revenue growth of 9.3 per cent, the lowest in at least three years and a decline of 500 basis points from that reported in the September quarter.

Tepid volume growth squeezed India Inc’s operating margin, which declined 110 basis points on a sequential basis to 16.4 per cent in the current quarter (a basis point is one-hundredth of a percentage point). This is mostly due to higher employee cost, which grew twice as fast as revenues, indicating lower capital utilisation. This gets further confirmed by a near-flat growth in power and fuel cost and paltry 5.1 per cent growth in raw material cost.

Experts attribute this to poor show by the manufacturing sector. “The numbers don’t surprise, given flat to negative growth in the manufacturing sector, as indicated by the Index of Industrial Production,” says Devendra Pant, chief economist and head of public finance at India Ratings, the domestic arm of Fitch Ratings. According to him, the trend is likely to persist for a few more months and an uptick could be expected only next financial year. “Exports have moved to the positive territory in January, for the first this financial year. This is a good sign for the manufacturing sector,” he adds.

Others say corporate results should be analysed sector-wise, given the wide divergence in growth across industries. “Service sector companies, such as private banks, IT services firms, trade and hotels & restaurants, continue to expand, with little risk of a slowdown in the near term. This has put a floor on the earnings and economic growth,” says Anand Kuchelan, vice-president (research), Padmakshi Financial Services.