Poised for an upturn

It's early days yet, but the trend in corporate results so far has been excellent. Topline growth has now been clearly established, in contrast to the earlier pattern of profits increasing mainly on account of lower interest costs.

Most of the sales growth has filtered through to the bottomline, thanks to the sharp reduction in costs in the last few years, which has increased operating leverage.

Even more encouraging is the fact that year-on-year growth has been higher in the fourth quarter compared to the preceding quarter for both sales as well as profits. Significant profit growth has been seen in the information technology, cement, telecom and auto ancillary sectors.

In information technology, companies have been able to increase volumes while billing rates have bottomed out. Cement companies have done very well, thanks to higher price realisations.

Higher commodity prices continue to be a source of profits for several companies, although some of the end-users have been hit because they have so far been reluctant to pass on price increases to consumers. The impact of higher commodity prices has been felt on operating margins, which have been squeezed a bit.

The underlying factors boosting corporate profits continue to strengthen. First, the good harvests have led to higher purchasing power, boosting domestic demand. The revival of growth in the global economy has also played a role, leading to robust demand.

The government's highway projects and the retail credit revolution have also played a part in stimulating demand. All these factors have led to growth in volumes, while a rise in price realisations in sectors such as cement and metals has also helped sales growth.

So far as profits are concerned, the appreciating rupee and higher raw material and staff costs are concerns in some industries, but it's important to realise that these factors haven't so far had an effect on the overall results.

As a matter of fact, growth in the corporate sector has now acquired a momentum of its own, as seen from the sharp rise in bank credit in recent months.

Furthermore, the rise in sales has led to higher capacity utilisation, and more and more units are announcing plans for expansion.

Once investment demand kicks in, the consumption-led growth seen so far will be complemented with corporate investment and we could see a resumption of the high industrial growth rates last seen in the mid-1990s. Putting it simply, corporate India is poised at the cusp on an upturn in the business cycle.

What can go wrong? The monsoons, of course. But the meteorological departmemt has forecast a normal monsoon. There has also been much talk of a slowdown in the Chinese economy, which will have an effect on commodity prices.

But to be fair, we haven't seen any sign of that happening so far. And despite all the concerns about the US twin deficits, the latest data suggest that the US economy is on the mend, which means that it can continue to function as the engine of global growth.

But perhaps the biggest uncertainty, as seen from the behaviour of the markets on Tuesday, lies in the outcome of the current elections, and a hung Lok Sabha or an unwieldy coalition could affect business confidence, pushing back investment plans.