The collective relief that was felt on Friday, when the encouraging fourth quarter and full-year GDP numbers were released, may turn out to have been premature because of the continuing sluggishness in corporate performance. Analysis of the results for the 2008-09 financial year, done by the Business Standard Research Bureau for over 1,200 companies, suggests that companies across a range of sectors continue to do badly, with stagnant or declining sales and with profit margins under continuing pressure. The striking exception to this pattern is provided by the oil companies. After having borne the burden of the government’s reluctance to raise the domestic prices of petroleum products last year, they have regained financial ground as retail prices have not been lowered in line with the sharp decline in international crude oil prices. The consequence is a huge increase in the earnings of these companies, but this fortuitous upturn may well be short-lived as crude prices have again risen in response to perceptions of the global economy stabilising. There cannot be a better time to reform the petroleum pricing system, and one would hope that Murli Deora lives up to his promise on this issue.
The oil companies apart, the remaining 1,241 companies in the sample reflect the overall weakness in the economy. Sales grew by a mere 6 per cent over the corresponding quarter of last year. That number would have been depressed slightly because of commodity price deflation during the period, which helped bring down the inflation rate quite sharply, but it also reflected the well-documented fact of poor demand for many products and services—whether it be civil aviation or goods transport by road, hotel occupancy rates or advertising services. Profitability was even more adversely affected; net profit for the sample (excluding the oil companies) dropped by 13 per cent over the fourth quarter of the previous year. To some extent, the margin squeeze was arrested by sharp falls in many commodity prices, but sluggish demand conditions clearly contributed. This is the aggregate view. There was a relatively wide dispersion of performance across sectors, with companies in areas like power and automobiles doing reasonably well, while those in sectors like steel and construction did quite badly.
There is an inevitable disconnect between the macro-economic and corporate numbers. Value addition in the manufacturing sector, which is extremely well represented in the sample, actually declined during the fourth quarter of 2008-09, with growth during the full year reaching a mere 2.4 per cent. Construction also saw a significant deceleration at the macro level, consistent with the performance of companies in this sector. By way of contrast, a significant contributor to GDP growth during the quarter was the public sector, reflecting the continuing implementation of salary increases. This is not, obviously, reflected directly in the corporate numbers. Essentially, the stabilisation that is being perceived in the economy is skewed towards some activities. As the numbers indicate, it is yet to fully transmit through to the corporate sector. Investors would be well advised to pay equal attention to both sets of numbers.