Continuing good news

India Inc.'s sales figures for the January-March quarter show some slowing of the pace of business growth. The net sales of 1,875 listed companies (excluding banks and financial institutions), as compiled by the Business Standard Research Bureau, show an increase of 22 per cent on a year earlier, compared with growth rates of 30 per cent and 33 per cent, respectively, in the previous two quarters. The June 2006 quarter had also seen sales increase by nearly 30 per cent. The silver lining to the latest quarterly numbers is that they are somewhat better than the 19.9 per cent growth registered in the March 2006 quarter.

But any hasty conclusion that the economy is slowing down will have to be avoided. The index of industrial production, after all, does not show any slowing of pace; the index increased by 11.3 per cent for the last financial year as a whole, and accelerated in March to an even better 12.9 per cent. The slowing of financial sales numbers when the physical index accelerates would suggest that companies are losing pricing power, but this is belied by the profit numbers. Operating profit in the quarter grew by 34.9 per cent, which is significantly faster than sales growth and therefore helped to improve company margins""which have moved up over the full year by a handsome 170 basis points, and stand at an impressive 19 per cent. However, it is also true that operating profit growth in previous quarters was even better""being as high as 53 per cent in the December quarter, and 35.6 per cent in the September quarter for the same sample of companies.

The improvement in operating margin, despite slower sales growth, suggests that the corporate sector has managed costs quite well. Staff costs, however, have increased by about 40 basis points over a year earlier when seen as a percentage of revenue""and should surprise no one. Other business expenses, which typically include rent, selling and distribution and power costs, have reversed the trend of the previous four quarters, when they were reducing as a percentage of sales; this time, they have gone up 100 basis points. It is against this backdrop that India Inc. has done well in managing raw material costs. In the March 2006 quarter, the universe of these companies had seen raw material costs increase by 224 basis points, when seen as a percentage of sales, and this was explained by the surge in commodity prices then. This year, India Inc. has reversed the trend and managed to reduce the cost of raw materials as a percentage of sales, by 140 basis points. It is not that commodity prices are lower this year; therefore, better material management must have played a role. While auto companies were adversely affected by the higher cost of metals, steel manufacturers and even tyre companies were able to improve their margins.

As should be expected in such a scenario, net profit growth too has slowed ""it was 43 per cent in Q2 FY07 and 76 per cent in Q3, but has dropped to 39.3 per cent in Q4 of FY07. The major culprit here is interest costs, which grew 29 per cent in Q4, compared to 16 per cent in the previous two quarters. Going forward, there is little doubt that as the RBI tries to control inflation, the higher interest rates will raise costs even as demand slows in the sectors dominated by credit-driven demand. However, corporate India has shown resilience in improving margins so far, and may surprise the country in the current quarter too by showing robust numbers when they get reported in July.