Q1 results show India Inc yet to see better days

Combined net profit of 290 firms, excluding IT, grows at slowest pace in nine quarters

The early-bird results for the first quarter of this financial year do not seem to justify the current rally on Dalal Street. The combined net profit of 290 companies, excluding information technology (IT) exporters, has risen only 2.4 per cent on a year-on-year basis, the slowest pace in nine quarters. The same set of companies had reported 3.8 per cent annual net profit growth in the previous quarter and 7.5 per cent annual growth in the same quarter last financial year.

The net profit of the entire sample of 316 firms that have announced their results so far (including IT companies) was up nine per cent year-on-year in first quarter, compared with 10.7 per cent growth in the fourth quarter of last financial year and 8.4 per cent growth in the year-ago period.

Volume growth has remained on a slow track, with revenues rising 10 per cent (except IT), compared with 10.5 per cent annual growth in the previous quarter and 3.9 per cent growth during the same quarter last year.

The brighter side, however, is that the companies in the domestic manufacturing and services sectors (excluding IT, financial and oil & gas ones) have reported higher net sales growth of 9.5 per cent in the first quarter, against 5.8 per cent in the previous quarter — the upside, though, has been largely due to a handful of good results like those of Idea Cellular, Asian Paints, TVS Motors and Reliance Power.

Analysts expect revenue growth to moderate in the coming quarters, as the trail impact of the pre-election spike in government spending might level off. Exporters like Tata Consultancy Services, Infosys and Bajaj Auto face the heat from a continued strength in the rupee on the back of foreign capital inflows.

Net growth for IT companies moderated to 18.3 per cent, from more than 25 per cent in the previous three quarters, while net profit moderated to 31.1 per cent from the previous quarter’s 37 per cent. As in the previous quarter, IT companies were still the biggest growth drivers, accounting for 80 per cent of the incremental net profit and 28 per cent of the incremental net sales in the first quarter.

Led by private-sector banks and non-banking financial companies (NBFCs), financial firms also aided the growth, accounting for 42.8 per cent of incremental net profit and 27.5 per cent of incremental revenues in the June quarter. Oil & gas majors, however, dragged the numbers down, with Cairn India reporting a sharp fall in net profit and Reliance Industries’ profit growth remaining muted at around 5.6 per cent.

Like in the March quarter, finance cost and wage-pushed inflation continued to hurt India Inc’s profitability. Interest cost (up 13 per cent year-on-year) again grew faster than operating profit (up 9.7 per cent annually), pointing to continuing of India Inc’s financial woes. The case has been similar in 10 of the past 12 quarters. Analysts expect the gap to worsen going ahead as most financially-stressed companies in construction & infrastructure, metals and power sectors are yet to declare their results.

 

Ditto with salary and wages. It was up 13.6 per cent (for all 316 companies) in the March quarter, faster than 11.5 per cent annual growth in revenues during the period.

The gap was even wider for companies excluding IT, financial and oil & gas ones. For these firms, salary and wages ran ahead of top line for a ninth straight quarter, indicating a continued moderation in labour productivity. Financial and IT companies were better off on this count, with their revenue growth exceeding rise in their salary bill.


On the brighter side, there was an improvement in operating margin due a mix of cost control and moderation in energy cost. On the downside, raw material cost was again inching up for manufacturing companies, in line with rising inflation. Raw material cost rose 11.4 per cent in the June quarter, against 9.5 per cent annual growth in net sales for companies excluding IT, financial and oil & gas ones.

The trend is likely to change when the top-rung companies declare their results later this week and next week, but chances are it could be worse, given the past experience.