Judged by the profits that companies are making, the current financial year’s second quarter has been arguably the worst since quarterly figures became available a decade ago—even as profit margins have fallen to razor-thin levels. Indeed, for many companies there has been an actual decline in profits, if not outright losses. Given that the downturn has just begun and very likely will get worse, this is depressing news, matched as it is by sundry surveys that show a comparably steep fall in business confidence—reflected in the numbers on capacity utilisation, new orders, investment plans, prices on inputs and output, financial stability and other similar parameters. For a common sample of companies that account for the bulk of corporate India’s sales, net profit growth more than halved from 11.2 per cent in Q2 2007-08 to 8 per cent in Q1 2008-09 and further to 4.9 per cent in Q2 2008-09. If you remove the oil companies, as you should because of the distortions caused by government policy, the figures are 19, 9.5 and 6.9 per cent, respectively.
That does not mean there is no silver lining, for several big companies have performed quite well in the July-September quarter. In the automobile segment, while Maruti Udyog and Tata Motors have seen their net profits fall by more than a third, two-wheeler giant Hero Honda reported 36 per cent growth in its top line and a stunning 50 per cent improvement in its bottom line. Reliance Industries reported only a 7 per cent growth in bottom line, but Tata Steel saw net profits rise 50 per cent, Tata Chemicals 34 per cent and Tata Tea 168 per cent ... the list goes on. Indeed, the surprising element in the whole picture is not the pressure on bottom lines but the healthy growth of top lines—revenues have actually surged in what is supposed to have been a difficult quarter. However, the slowing down of the overall economy does mean that sales too will lose momentum, even as there is further pressure on margins. Companies like the auto firm Hyundai have raised prices, which may help protect margins but could dampen demand. While companies like Larsen & Toubro have seen 32 per cent growth in net profits, the slowing down of infrastructure spending will impact it in the next quarter. Ditto for construction firms where, already, margins are squeezed because of slowing demand and price pressure. A significant development is that interest costs have doubled from a quarter ago to around 38 per cent of post-tax profits, and this is before banks started slashing credit limits and hiked lending rates as a response to the liquidity squeeze.
The future is clouded by many uncertainties. There is the softening of commodity prices, which will bring cost relief to some firms while hurting the producers in those sectors. The dip in the rupee’s external value will neutralise some of the commodity price decline, and provide some pricing cushion to domestic producers while giving better returns to at least some exporters. The liquidity squeeze will affect spending, but the drying up of fresh investment that will result from the stock market’s downturn will in time help existing producers regain some pricing power. Overall, economic growth is likely to be slower than most forecasters have been putting out, and the mood is not likely to improve as companies start asking employees to leave. In short, the coming months will test companies’ mettle in quite different ways from what happened during the go-go years that have ended.
