If any proof was required that industry was slowing — standard year-on-year numbers show a healthy 11.5 per cent growth but the seasonally adjusted numbers show a sharp decline in growth — the first quarter results provide ample evidence. While sales for 793 manufacturing sector firms that account for 70 per cent of India Inc’s net profits grew at a healthy 24 per cent (hence the increase in the HSBC Markit PMI that most newspapers reported yesterday), this is lower than 2009-10’s last quarter growth of 33 per cent. More important, even though growth in raw material prices started reducing in Q1, it was still higher than the growth in top-line revenues of companies and so, as a share of the top line, raw material costs rose from 40.4 per cent in Q4 2009-10 to 43.3 per cent in Q1. As a result, the bottom line has taken a huge hit — operating profit margins are down from Q4’s 17.1 per cent to 14 per cent in Q1 and net margins from 9 per cent to 6.2 per cent. Once public sector oil refining/marketing firms declare their numbers, things are likely to look worse.
If commodity prices start easing, as is expected, once Chinese growth slows, the impact on margins will be immediate. Automobiles, for instance, will see margins recovering — Q4 margins of 9.3 per cent fell to 7.7 per cent in Q1 as a result of rising raw material costs. The impact on commodity firms will be negative, so the net impact will not be as straightforward as one may naturally assume, but on balance, it should be positive. Curiously, while CMIE data suggest capital spending continues to boom — in the June quarter, CMIE’s CapEx database had 900 new announcements with investments totalling Rs 5,80,000 crore, a number that is higher than earlier peaks — other indicators point in different directions. The IIP’s capital goods index rose a healthy 34 per cent in May but this was lower than April’s 70 per cent. Seasonally adjusted data show a fall in growth right from April onwards. To the extent that companies finance investments through raising fresh capital, the funds raised in Q1, in India as well as globally, are down a fourth — given the large cash balances that companies have, however, this indicator needs to be treated a bit cautiously as firms don’t have to immediately tap markets to finance projects. The poor profits performance, though, suggests the stock market may be a bit over-priced and that could have its own consequences. The continuing demand for cars would suggest that demand continues to be robust even though there is pricing pressure. Apart from watching out for the impact of the latest round of rate hikes, a lot depends on how the recovery in the US and the euro area picks up or whether it falters — the IMF suggests it is picking up, but its forecasts have been wrong in the past.