Manas Chakravarty: India Inc shines brighter

Given the turnaround in the corporate sector it is no wonder the India story is so attractive

The first quarter results mirror several themes that are being played out in the Indian corporate sector. At the macro level, much attention has been focused on the prediction of a slowdown in earnings growth.

But when the results of a sample of 1,765 companies (leaving out oil companies and banks) show an average year-on-year (y-o-y) growth of 46 per cent in net profits, there's not much use complaining about a slowdown.

Apart from the big picture, however, there are several other broad motifs. One concern has been that of a rise in raw material costs. To take specific examples from the first quarter, while L&T's EPC margins declined on account of an increase in material prices, net profits rose 37 per cent y-o-y.

At Bharat Heavy Electricals Ltd (Bhel), operating profits rose seven-fold, despite higher material costs, thanks to productivity gains. In the automobile sector, Tata Motors' expenses as a percentage of sales rose by only 20 basis points, in spite of very low revenue growth.

In a different industry, Jet Airways' EBITDA (earnings before interest, taxes, depreciation and amortisation) margins fell 300 basis points mainly because of a rise in fuel expenses, but higher volumes more than made up. In short, most of India Inc is still able to offset the effect of higher raw material and fuel and power costs.

Wage costs too have moved up. A good example of how rising salaries have impacted companies is NDTV, which reported a 73 per cent y-o-y drop in operating profits, mainly because of a 44 per cent rise in salaries. Infosys has blamed salary hikes and higher visa application fees for the drop in its margins.

The flip side of the rise in raw material costs should be better results for the raw materials producers. Steel Authority of India's (SAIL's) results, despite lower sales volume, saw higher revenue and margin expansion, primarily on account of higher y-o-y realisation. For Tata Steel, despite lower sales volumes, margins improved on the back of higher realisation and cost savings.

Among the export-oriented sectors, while topline growth has slowed among the IT majors, difficult times have continued for many of the pharma exporters. Ranbaxy Laboratories' results indicate that there have been no signs of easing of pricing pressures in the US generics market. Biocon faces pricing pressures in the European markets.

But perhaps the true impact of going global can be seen from Tata Tea's results "" thanks to the Tetley acquisition, it has shown topline growth on rising branded tea volumes despite selling off its tea estates in south India. Similarly, for VSNL, with two global acquisitions "" Tyco and Teleglobe ""under its belt, the company's business model will change dramatically.

Among other themes, the capex boom continues to be reflected in the order books of engineering companies. At ABB, for instance, order intake has grown 43 per cent y-o-y, at Siemens it was up 43 per cent, while for L&T is was up 47 per cent.

The opening up of textile exports hasn't really turned out the way it was expected to. At Arvind Mills, for instance, topline growth was a mere 7 per cent, but profits rose 148 per cent, thanks to a sharp decline in the cost of cotton. And despite concerns on pricing, Gokaldas Exports' margins have fallen only slightly.

There was also a turnaround in the FMCG sector, with HLL's domestic FMCG sales growing by 11.8 per cent, the highest in the past 24 quarters.

Coming to the new businesses, retailing continued to do excellently. Shoppers' Stop's sales rose 28 per cent, while Trent reported 58 per cent growth in retail sales.

The corporate results reflect the broad trends that are shaping the face of India Inc. First, India is increasingly integrating itself into the global economy "" this is seen from the rise of outsourcing in the IT and IT-enabled services sectors, the pharma sector, the growth in exports and in global acquisitions.

Second, Indian industry is expanding rapidly at home, seen from the rise in capex and the bulging order books of engineering companies. Third, consumption demand in India is alive and kicking, seen from the improvement in the bottomlines of FMCG companies and in the automobile, especially the two-wheeler, industry, and this is supported by consumer finance, which, together with mortgage lending, has been the main reason for loan growth in banks.

Fourth, Indian companies have made great advances in productivity, which has enabled them to counter rising costs, inevitable when an economy is growing rapidly. And fifth, new opportunities have opened up for private enterprise, such as in telecom, civil aviation and retailing, and each of these sectors is showing explosive growth.

Given this transformation in the Indian corporate sector, is it any wonder that the India story looks so attractive?