Moderate deceleration

What many people were expecting from aggregate corporate results during the July-September quarter have not materialised. Analysis of the quarterly results reported by over 1,400 manufacturing and services companies by the Business Standard Research Bureau indicates that the growth rate of sales over the corresponding quarter of the previous year was 12.3 per cent, the lowest since the third quarter of 2005-06 for this sample, when it touched 14.7 per cent. This indicator has been in the 20-30 per cent range in the six intervening quarters. The other indicator of corporate performance, profit after tax, grew by a healthier 21.2 per cent during the quarter, but there was a significant contribution of other income, which grew by 37 per cent. Even after this, the latest quarter's growth in earnings was significantly below the previous quarter's mark of 33.8 per cent. To put this into perspective, earnings growth over the last several quarters has been more volatile than sales growth. After a low of -0.8 per cent in the third quarter of 2005-06, it saw some quarters of 30 per cent plus growth, reaching a high of 60.6 per cent in the third quarter of 2006-07. However, it also dipped below 20 per cent in two of the six quarters after the decline.

The broad similarity of the pattern across a range of sectors points to the number of factors simultaneously impacting negatively on corporate performance. Oil companies, for example, saw an overall decline in their sales growth, presumably due to the fact that the rising price of crude oil during the quarter impacted sales of products whose prices are not capped. Their profitability, of course, is heavily influenced by the increasing gap between the administered retail prices of four key refined products and the market price of crude, which even an appreciating rupee has not been able to offset. The one exception to this pattern is Reliance Industries, whose revenues from petroleum are being generated entirely by exports of refined products, thus allowing it the full benefit of elevated global prices. Although its rupee earnings are diluted by the higher rupee, its profitability remains healthy. The other sector to turn in a widespread decline in performance was automobiles, particularly motorcycle and commercial vehicle manufacturers. Higher interest rates, but, more importantly in the case of the latter, a virtual saturation in fleet replenishment contributed. Along with this, a number of the auto component businesses also saw a downturn, with the notable exception of brakes and lamps; increasing congestion and more frequent collisions presumably resulted in more frequent replacements!

A number of sectors, such as pharmaceuticals and IT/ITES, saw slower growth in rupee earnings, largely as a result of currency movements. Another pattern visible in the numbers is the relatively weak performance of smaller companies across the board, barring a couple of sectors, notably steel. Overall, while there are some longer-term factors at work, interest rate and exchange rate movements seem to have played an important role. The former are showing signs of reversing, while it is still uncertain as to how the latter will behave in the coming months. However, economies of scale appear to provide a significant offset against a more hostile environment, pointing to persistent merger and acquisition activity, which will continue to boost other income for a while. In tune with the economy as a whole, the corporate sector also shows signs of a moderate deceleration.