The corporate results that have been announced so far for the October-December quarter would suggest that there is some way to go down, before companies hit the bottom. Sales growth is admittedly slower than in recent years, but still surprisingly positive at about 15 per cent. So if companies like Ashok Leyland are seeing their sales collapse, there are plenty of others who are doing quite well even now. Against this, post-tax profits have been shrinking, which means that profit margins have been squeezed quite substantially; the net profit/sales ratio has dropped from 15 per cent a year ago to about 11 per cent now. But, and this is the important point, it is still much better than the profit/sales ratio of 7-8 per cent that used to prevail before the start of the 2003-08 boom years. Indeed, if you take the corporate sector as a whole, it is still delivering positive EVA (economic value added)—which is another way of saying that companies’ average rate of return on capital (pre-tax) is better than the average cost of debt. This too was not the case at the time of the last downturn. If this is the mother of all recessions in the post-war world, then Indian companies are still a long way from hitting the bottom.
There is one reason why the numbers could get worse, and two factors that suggest more optimistic scenarios. The negative factor is that the best results come early, and it is their results that have been available so far; companies that have not done so well tend to delay announcing their results. When all the corporate numbers are in, therefore, the total picture might look less reassuring.
Against this, there is the argument that just as Indian banks are not collapsing like those in the US and Britain (indeed, many of them have reported massive profit surges), Indian companies too will continue to do better than those overseas—because the Indian economy will continue to be one of the fastest growing in the world. The gloomiest forecasters talk of a minimum of 4 per cent growth next year; the non-agricultural sector will therefore have to grow faster than that. Add inflation and it is entirely possible that corporate sales growth will not drop below 10 per cent. The second reason for optimism would relate to the profit slump; in the wake of the Satyam episode, companies are making a cleaner breast of their problems, as with losses on foreign currency derivatives. Certainly, the scale of derivative losses being reported by Ranbaxy and some others is unusually high and suggests that all the dirty linen is being aired. So it could well be that the drop in profits is being over-stated by some companies because their books are being cleaned up.
Perhaps all this is true, but the one over-riding issue which tells us that things will get worse for Indian companies is the sense that the industrialised countries are still deep in a mess. Despite pumping in massive sums of money, and dropping interest rates to historic lows, the scale of the problems being confronted has not diminished. Banks are being bailed out all over again as their losses mount, credit card debt defaults are starting to kick in, the housing market is in deep freeze, car sales are down to the levels of a quarter century ago, and the unemployment numbers continue to climb. For good measure, China’s quarterly growth rate is now the lowest in recent memory. It is hard to believe that all this can be going on without hitting Indian companies. So there should be more bad news to come.