Analysis of the fourth quarter results of over 200 companies by the Business Standard Research Bureau confirms expectations of a significant slowdown in both sales and profitability. The sample, which excludes banks and other financial sector companies, shows that all key financial indicators declined relative to the fourth quarter of 2007-08. Sales were down by almost 5 per cent; operating profits (EBIDTA) by almost 6.5 per cent and net profits (PAT) by a significant 11.7 per cent. Consequently, operating profit margins declined from 18.2 per cent a year ago to 17.5 per cent in the quarter just ended, while net profit margins came down from 12.7 per cent to 11.7 per cent over the same period. The changes in sales clearly reflect the impact of the economic slowdown. Since the inflation rate over the corresponding quarter of last year has been very low, the decline is largely attributable to lower volumes. The surge in commodity prices, which began towards the end of 2007-08, has now abated, allowing input costs to moderate for many manufacturing sectors.
However, a couple of other factors have adversely affected profitability during the quarter. First, interest expenses went up by a huge 41 per cent, reflecting the persistent tightness of credit in the Indian economy. Banks, which have virtually become the sole source of funds to businesses as capital markets have turned dormant, are still inclined to play it safe despite admonitions from the Reserve Bank of India. As long as these conditions prevail, both toplines and bottomlines will find it difficult to stage a recovery. Second, the volatility of the rupee during the quarter affected the profitability of several companies.
As worrisome as these numbers are, analysts are striking a few positive notes. First, at the aggregate level, while margins are lower, they are still quite healthy. The corporate sector as a whole, represented by this sample, is clearly far from being in loss-making territory. Second, the performance of some companies reinforces the perception that there are significant buffers of domestic demand. The outstanding performance of Hero Honda, much commented on, is a case in point. The company’s ability to buck the trend appears to have come from a buoyant rural market, which has not been significantly affected by the goings-on in other parts of the economy. A normal monsoon this year, which has recently been forecast, will reinforce the ability of rural consumers to provide some offset to the slowdown. Further, the rolling out of pay hikes to public sector employees will also help to boost consumer demand. Finally, factors such as interest rates and exchange rates are likely to be more benign in the quarters ahead. Monetary policy is doing its bit to lower rates and it is really only a matter of time before borrowers begin to see the impact. Also, the pattern of capital flows, which has contributed much to the rupee volatility, should stabilise. If the fourth quarter numbers indeed reflect the impact of a really adverse environment, they have to inspire some confidence in the shock absorption capacity of the corporate sector. This may be one reason why equity markets are steadily making up lost ground, even as the short-term outlook remains rather gloomy.