While the majority of company results for the second (July-September) quarter is yet to come in, it is important in the current turbulent environment to get a sense of the trend in corporate performance as early as possible. After all, the Index of Industrial Production (IIP) for August revealed a massive deceleration in manufacturing output. If this is not an aberration, it should reflect in the quarterly results of companies in that sector. The Business Standard Research Bureau has analysed the results of 137 companies with a view to getting the early picture. As expected, the analysis reveals a somewhat mixed performance during the quarter, but with the impact of macro-economic developments clearly showing up.
For the entire sample, revenues grew by almost 30 per cent over the corresponding quarter of last year—which is a healthy number in any context. This should come as no surprise, though, for two reasons: the early bird results tend to be of companies that have done well; and the rates of price increases for most products and services have been relatively high. The fact that rising prices rather than increasing volumes account for revenue increases should show up in depressed profit numbers, since input prices would also have risen during the period. This is indeed the case, with net profits growing by a more modest 16.5 per cent. The fact that they grew at all is to the credit of the companies, who have been diligent about managing efficiency and costs. In this scenario, margins were under visible pressure, declining from above 22 per cent in the second quarter of 2007-08 to around 20.4 per cent this year. While the decline is significant, even the current margins for this sample of companies are relatively healthy.
The main reason for the decline, as would be expected, is higher input costs. Other than material inputs, interest costs went up significantly. Companies that had borrowed abroad were badly affected by the global credit crisis, which has significantly raised their effective cost of funds. Even with all these factors at work, however, profits for this sample actually increased from the previous quarter. Of course, the picture varies across sectors. Information technology (IT) and engineering have done relatively well during the quarter, reflecting the impact of a depreciating rupee, on the one hand, and softening commodity prices, on the other. Profits in other sectors look sluggish by comparison, and some sectors look set to see a decline in net profits, compared to the corresponding quarter of 2007-08.
Admittedly, the sample is too small to yield clear signals for this week’s monetary policy announcement. However, for what it is worth, the picture is not one of a broad-based decline in performance. A traditionally cyclical sector like engineering appears to be holding up reasonably well under the circumstances. IT companies appear to have reduced their dependence on and, therefore, their vulnerability to the US financial sector. The sharp turn in the global oil, commodity and interest rate cycles will clearly show up in the form of lower cost pressures during the current (third) quarter, possibly resulting in an improvement in margins. The real danger in a slowing economy is to top line growth, as volumes becomes sluggish. Undoubtedly, these are very preliminary indications, and firmer indications will come as more companies announce their results.
