A quick glance at the headline numbers for the fourth quarter (Q4) results suggests that India Inc is back on the fast-growth track, just as the pundits and politicians had forecast. However, the devil — and one that is likely to keep CEOs awake at night — is in the detail. Certainly, top-line growth confirms that after a two-quarter hiatus, demand is back with a bang, continuing a trend that began in Q3, especially when automobile companies displayed sales numbers that surprised analysts and themselves. Business Standard Research Bureau calculations show that net sales of 741 manufacturing and services companies that have declared their Q4 results for 2009-2010 so far grew a healthy 40.51 per cent in January to March over the same period in the last fiscal. This is almost double Q3’s top-line growth of 24.2 per cent and reverses shrinking sales in the first quarter of 2009-10. The numbers look healthy even when the results for Reliance Industries Ltd, India’s largest listed company that doubled sales this quarter on the back of rising oil prices, are excluded. Sans RIL, India Inc’s Q4 top line grew 40 per cent over the same period in 2008-09, against a 13.5 per cent year-on-year growth in Q3.
Net profit also grew at a decent pace of 40.49 per cent over January-March 2008-09, reinforcing optimistic predictions that the good times are back. It is worth noting, however, that net profit growth represents a slowdown from the headline-grabbing 69.39 per cent growth in Q3. This could partly explain why no one’s popping the champagne just yet — and the answer becomes clearer from operating margins. Q4 operating margins have been almost stagnant at 12.51 per cent against 12.47 per cent in Q3, and almost a percentage point lower than 13.75 and 13.25 per cent in the growth-constricted first two quarters of the fiscal. Most of India Inc’s chief financial officers are unlikely to be surprised by this. As stubbornly high inflation indicates, raw material costs have soared at a much faster rate than sales (even as prices fell in the first two quarters because of shrinking demand). Q4 is no different. From a relatively modest 28.73 per cent growth in raw material costs in Q3, they rose almost 60 per cent in Q4. Excluding RIL (and, therefore, reducing the impact of crude oil costs), the year-on-year jump in raw material costs for Q4 is no less dramatic: 40 per cent against a relatively modest 9.48 per cent in Q3.
To be sure, most of the 741 companies in this sample are relatively smaller ones. Barring IT, companies in industries like steel, cement, automobiles and fast moving consumer goods, and the large public sector organisations are yet to declare their results — most are taking advantage of the three-month deadline and are likely to do so only in June along with their full-year numbers. All the same, the sample can be considered a fairly accurate pointer to what Q1 of the new financial year will look like. It is clear that the commodity cycle is beginning to turn, so raw material prices are likely to rise sharply, which will inevitably impact profit margins. So going forward, cost-control will increasingly determine a company’s competitive advantage, just as it did during the slowdown.
