B G Shirsat & Manas Chakravarty: India Inc's sizzling performance continues

Despite predictions, there are no signs of a slowdown

Plenty of corporate results for the fourth quarter of financial year 2005 are now out, enabling us to answer that anxious question asked at the end of every quarter "" is corporate India's sizzling rate of growth finally slowing down?

During the third quarter, far from showing any signs of a slowdown, India Inc's revenue as well as profit growth accelerated, despite widespread predictions of gloom.

This time too, the broad reasons for anticipating a deceleration are the same. These include the effect of a higher base, the impact of raw material prices, the rise in interest rates and higher oil and coal prices, all of which would hurt the bottomline.

Further, there was some concern that with many companies approaching the limits of their capacity utilisation, topline growth too could be affected.

As the aggregate results of 825 companies show, there has indeed been some slowdown, albeit a rather marginal one, with the year-on-year (y-o-y) rate of growth in topline as well as the bottomline coming down.

Moreover, net profit growth has decelerated a bit more than topline growth, indicating cost pressures.

At the same time, corporate performance was expected to vary widely from sector to sector. For instance, everybody expected the pharma sector to do badly in Q4, thanks to issues relating to value-added tax (VAT).

Destocking on account of VAT was also expected to hit the FMCG segment. The auto sector was expected to do badly in Q4, because of rising raw material prices, the base effect, and VAT-related problems.

On the other hand, the metals, capital goods and software sectors were expected to continue doing well. Any analysis of the fourth quarter results must take into account the sectoral performance.

That is precisely what we have attempted to do "" while a clear picture of all sectors will not be available because several key results in sectors such as steel and oil have not yet been announced, the broad trends will be clear.

Let's take the software results first. The market had expected great things from this sector, and Infosys' muted guidance was the trigger for a meltdown in tech stocks.

But a closer look at the software results announced so far "" which includes all the big names "" tells a more hopeful story. In Q4, the sales of all the software companies in the sample rose by 33.87 per cent y-o-y, better than the 30.22 per cent y-o-y growth in sales notched up for the same sample during the third quarter.

On a sequential basis, sales in Q4 increased by 9.98 per cent compared to Q3 sales. But it's at the net profit level that there's real cause for optimism.

While Q3's y-o-y growth in net profit was 19.93 per cent for the sector, the y-o-y rise in Q4 was 32.90 per cent. Sequentially, net profits rose a sharp 14.93 per cent. Clearly, there's no sign of a slowdown in the IT sector.

To be sure, negative surprises from TCS, which reported a flat topline and a reduction in operating margin, and from Wipro, whose numbers disappointed, hogged the headlines, but the markets seem to have over-reacted to the disappointment.

The engineering and capital goods sector, too, was expected to do well, on the back of the rise in capital expenditure by corporate India. And it hasn't disappointed. The Q4 sales growth on a y-o-y basis has been a high 25.16 per cent for the sector, compared to 26.53 per cent in Q3.

There has, however, been a deceleration of sorts at the net profit level, where growth was as high as 67.11 per cent in Q 3, and has dropped to 53.25 per cent in Q4.

Clearly, there has been some pressure on account of rising material costs, but a 53 per cent growth is hardly evidence of a slowdown. Big companies have done even better "" ABB's net profits are up 63 per cent, and Siemens' 89 per cent.

A similar "slowdown" also occurred in the metals sector where y-o-y growth for the sample of companies that have declared their results indicate that net profit growth was 85.90 per cent y-o-y in Q4, down from 141.99 per cent in Q3.

On the sales front too, growth slowed from 63.61 per cent in Q3 to a slightly less dizzying 56.42 per cent. Note that Q4 profit for the sample was higher by 52 per cent than Q3 profits. Both Hindalco and Nalco turned in impressive performances.

On the negative side, the pharma results were a bitter dose for investors. The topline for these companies declined on a y-o-y basis by 3.3 per cent in Q4, compared to growth of 16.81 per cent in Q3.

The bloodletting was worse at the net profit level, which declined 31.98 per cent in Q4, compared to a y-o-y growth of 27.25 per cent for the same companies in Q3.

Ranbaxy's global sales fell 10 per cent y-o-y in Q4, while its net profits were down a steep 62 per cent. However, there were a few exceptions to the rule, Sun Pharma's performance being one of them.

It's clear, however, that there are more negatives in pharma than VAT.

What about FMCG? A turnaround story had been scripted for the sector, thanks to the cessation of price wars and a long-delayed rise in volumes.

To be sure, the companies in this sector vary widely from Nestle to Marico to Hindustan Lever, but the broad trends do indeed show improved performance. For the sector as a whole, topline growth was 7.4 per cent in Q4, an improvement on the 4.85 per cent growth notched up in Q3.

Net profit growth was almost flat at minus 0.36 per cent in Q4, compared to a decline of 20.15 per cent in Q3. HLL reported the highest sales growth in 14 quarters. But bottomline growth in the sector has been nothing to write home about.

Results in the textile sector show the improvement widely expected by the markets, although whether the improvement is due to the scrapping of the quota system is hard to tell.

Net profit growth in this segment was a negative 41.35 per cent in Q3, and that has improved to a positive y-o-y growth in net profit of 2.26 per cent in Q4. On a sequential basis, net profits in Q4 have been 112.59 per cent higher than net profits in Q3.

Cement has been another industry where there appear to be signs of a slowing down. Y-o-Y growth in net profits for the sample of cement companies has been 37.02 per cent in Q4, compared to 58.37 per cent in Q3.

Margin pressures stemming from higher coal costs are apparent.

Overall banking results have shown an improvement, as banks learn to increase their core business and operate without the artificial boost provided by selling investments.

While banks' topline growth has been 11.82 per cent in Q4, higher than Q3's 7.97 per cent, net profit growth on a y-o-y basis has been 7.03 per cent y-o-y, an improvement on Q3's 1.15 per cent.

ICICI Bank's 35 per cent growth in net profits stands out as an exceptional performance.

Unfortunately, the results from the auto sector are yet to be declared. But Hero Honda's y-o-y decline of 190 basis points in EBITDA margins, and sequential decline of 40 basis points, is a clear indicator of the cost pressures.

Margins have also been affected in auto ancillares. Conversely, the results from the integrated steel companies are expected to be excellent, thanks to price increases.

The picture is also mixed on interest costs. While they have increased in Q4 compared to Q3 in the metals, telecom, textiles, sugar and capital goods industries, they have declined in pharma, FMCG and in the cement sectors.

Apart from the sectoral performance, what is the big picture? Margin pressures have clearly got worse for most sectors, and capacity constraints have restricted topline growth. Infrastructure constraints, too, are being felt, notably in power and coal.

Employee costs are also rising. The silver lining is that investment demand is kicking in, with companies going in for capacity expansion. Also, there is no evidence of any falling off of demand.

And finally, topline growth of 19 per cent and net profit growth of 38 per cent can hardly be called a slowdown.