The Indian corporate sector reported robust revenue and net profit growth in the previous quarter. The analysis by the Business Standard Research Bureau of available data from 900-odd companies that have announced their first-quarter (April to June 2011) results shows that their aggregate revenue grew by 27.09 per cent and net profit by 16.93 per cent over the same period last year.
The growth rate of the operating margin shrank 126 basis points to 14.21 per cent, which was widely expected given the double-digit increase in raw material and wage expenses in the same period. This would indicate that the Reserve Bank of India was not off the mark in suggesting that the fact that producers operating at high levels of capacity utilisation are able to pass on rising commodity prices and wage costs to consumers is indicative of their retaining considerable pricing power.
If despite this data, India Inc is in a blue mood, it means other worrying factors are also at work. A closer look at the numbers may offer some answers. For example, the net profit growth figure comes down to just 3.16 per cent if the handful of oil marketing companies and the 10 most profitable companies are excluded from the list. This shows the good news is not indicative of broad-based growth. Consider the case of the fast-moving consumer goods sector. While performance has been steady, with companies exploiting economies of scale to drive profit growth, the fact is that it will be a while before volume growth returns to double digits, given inflationary expectations. Similarly, barring the exceptional performance by Cognizant, most information technology companies reported weak results.
The most disappointing, however, is the weak performance by the capital goods and engineering companies. While market analysts were not too shocked at the fate of companies like Crompton Greaves, whose margins caved in owing to weak pricing ability and rising costs, the shocker was Bharat Heavy Electricals Ltd (BHEL), which has acquired the status of a showpiece company. At the end of the January-March quarter, the management had told analysts that it expected a revenue growth of 20 per cent in the current fiscal year. Instead, BHEL ended the April-June quarter with a growth rate exactly half of that. A bigger concern remains the sharp slowdown in the rate at which the company is getting new orders, and the competition from China. It seems growth prospects for the capital goods sector are not all that reassuring going forward. Moreover, a large part of the profit of quite a few large companies is owing to “other income” on account of better treasury yields and investment gains on surplus fund deployment. Take Maruti, for example. Though the automobile major experienced dismal topline growth of three per cent, it managed net profit growth of over 18 per cent owing to higher non-operating income.
India Inc’s blue mood also reflects the fact that credit rating downgrades have outpaced upgrades in the April-June quarter, reversing the previous financial year’s trend. The mood on the street can be best summed up by the reaction that followed Reliance Industries Ltd’s reasonable 16.7 per cent increase in net profit for the quarter ending June. The markets discounted the number since almost 40 per cent of the net profit gain had come from investment income, not core operations. Also, while the refining business has helped the company, the outlook on this front is quite uncertain.