The trend in corporate results in the quarter ended September 30, 2011 (Q2, 2011-12) is grim and unequivocal. India Inc is struggling to cope with a toxic combination of high inflation, rising interest costs and unpredictable currency movements. Overall, this bids fair to be the worst quarterly corporate performance since October-December 2008. There are a few isolated outperformers. But most firms in the Business Standard database of 1,457 listed companies have not been able to maintain margins in the face of adversity. As many as 339 have reported outright losses, while another 689 have reported lower profit after tax (PAT) compared to the quarter ended September 2010 (Q2, 2010-11). Overall, PAT dropped 12 per cent for the entire sample in comparison with Q2, 2010-11.
The aggregate results show that turnover has certainly expanded. So demand still exists in the system. In comparison with Q2, 2010-11, the aggregate turnover increased 23 per cent. But expenses rose 25.5 per cent and interest costs jumped a whopping 52 per cent. As a result, margins have shrunk alarmingly. Considering profit before depreciation, interest and tax or PBDIT, the aggregate operating profit margin (OPM) dropped to 28.3 per cent of turnover in Q2, 2011-12, from over 30 per cent in Q2, 2010-11. Even more strikingly, PAT as a percentage of turnover shrank 340 basis points to eight per cent from 11.4 per cent earlier. Interest as a percentage of turnover rose to 13 per cent from an earlier 10.7 per cent.
Given that the wholesale price inflation index ran at over nine per cent through the quarter, and policy rates have been raised continuously for 18 months, the results are not so surprising. However, since the 364-day Treasury Bill currently offers a yield of 8.5 per cent, many entrepreneurs and investors may wonder if it’s worth running a business at all. Even many profitable firms are generating lower returns on capital employed compared to risk-free government securities. As always, results are lumpy with profits unevenly distributed. The top 10 firms in terms of PAT accounted for over 30 per cent of all PAT. In sectoral terms, two-wheelers, IT and IT-enabled Services (ITeS), crude and gas producers, and banks all did better than consensus expectations. But a host of other sectors underperformed. These included metal producers, refiners, capital goods manufacturers, producers of fertilisers and agrochemicals, construction and real estate firms, non-bank financial companies and telecom service providers. The sectoral break-up reflects global macroeconomic trends. IT and ITeS, and to some extent, pharmaceuticals, benefitted from the weakening rupee, which boosted overseas earnings. Incidentally, 74 firms booked losses on the forex account (nine made profits), in contrast to Q2, 2010-11 when 23 firms had booked forex losses and 25 gained.
Meanwhile, metal producers were hit by softening demand and lower global commodity prices. Crude and gas producers benefitted to some extent from higher global prices while public sector refiners were hit by the inability to pass on those price hikes due to government policy. In the circumstances, the stock market has acted rationally by going bearish. The big question: Is this the bottom of the business cycle or at least, close to the nadir? If the RBI loosens up in its next monetary policy review, that would provide some relief, in terms of interest burden. But a significant turnaround appears unlikely until such time as a global rebound occurs.
