Q4 results take sheen off India Inc

Rising interest rates and higher inputs costs seem to have taken the sparkle out of corporate results in Q4 2007.

A study of the unaudited quarterly results of 1,875 companies shows that the net profit growth of 38.88 per cent in the fourth quarter ended March, 2007, has been lower than that for the two preceding quarters.

The same sample of companies saw net profit grow 76 per cent in Q3 (the December, 2006 quarter) and 43 per cent in Q2 (the September, 2006 quarter).

Sales growth reflects a similar story, with aggregate growth declining to 20.08 per cent, against over 30 per cent in the previous two quarters. However, India Inc achieved sales growth of over 20 per cent for five consecutive quarters between March 2006 and March 2007.

These 1,875 companies posted an aggregate net profit of Rs 34,518 crore in Q4 2007, against Rs 24,854 crore in Q4 2006. Total income increased to Rs 3,11,623 crore, against Rs 2,59,516 crore in the year-ago period.

Despite slower growth in sales and profit, there are signs that India Inc has become more efficient. Operating profit margins (OPM) increased 100 basis points from 18.90 per cent to 19.94 per cent and net profit margins 96 basis points to 10.99 per cent.

Significantly, mid-cap companies outperformed the Sensex and small-cap firms in profit growth during the quarter. The 172 mid-cap firms classified by the Bombay Stock Exchange (BSE) posted a 70 per cent growth in net profit, against 34 per cent by Sensex stocks and 53 per cent by the 272 small-cap companies.

"Stock prices are also expected to reflect the trend seen in the results and mid-cap companies will do better in the coming quarters," predicted Milind Barve, MD, HDFC Mutual Fund.

The improvement in the performance of mid-cap companies reflects a significant cyclical change.

They outperformed large cap stocks between January 2003 and September 2005, after which large caps resumed their growth leadership. The Q4 results, therefore, reflect a swing back in favour of mid-caps.

The net profit of as many as 83 companies from mid-cap and small-cap categories has more than doubled and 25 firms have reported a turnaround during the quarter.

However, Sensex and mid-cap firms posted 20 per cent growth in sales income, compared to 34 per cent growth reported by small-cap companies.

Among Sensex firms, Grasim Industries, Infosys Technologies and ACC posted over 50 per cent growth in net profit, while Hindustan Lever, Bajaj Auto, Hero Honda Motors and Cipla reported over 10 per cent drop.