Corporate India will be under sustained pressure from here on
Feb 18 2013, 2314
India Inc’s results for the third quarter are disappointing, with the big boys failing to improve their performance. While growth numbers have been declining for the past five quarters, net profit numbers have shrunk in the third quarter registering a growth of only 1.06 per cent for Nifty companies. The overall numbers would have been far worse had it not been for some large software companies, what with almost 18 Nifty companies posting negative growth in their net profits on a year-on-year basis? Such below-par performance is not limited to one sector or two, but is visible across the spectrum. Even the net interest margins of banking companies have fallen, raising questions about the quality of assets in the banking system. This poor third quarter showing by corporate India indicates two specific trends. First, a demand slowdown has firmly set in the economy, and this is more than merely a calibrated slowdown. Not only capital goods and infrastructure sector companies have posted dismal performance, the domestic consumption story too has taken a severe beating. That is why auto companies, across their various sub segments, and FMCG companies have also seen slower growth in both their topline and bottomline during the third quarter. Topline growth in these two sectors has a declined far more rapidly than anticipated by most of analysts. Secondly, the trend indicates that a majority of companies carrying high debt burden are now facing bigger trouble of servicing their loans and the situation could turn worse if interest costs don’t come down soon. Corporate topline growth is nothing to write home about. Barring Ranbaxy, third quarter sales growth of Nifty companies is barely 9.28 per cent, which, adjusted for inflation, means that sales of these companies have not grown at all. The decline in growth of overall net profit can happen either because of increased depreciation charges or higher interest costs. The first reason of rising depreciation charges is ruled out because it can only happen when companies add to their gross assets at the time of expansion through either greenfield or brownfield expansion. But, hardly any company has undertaken a major expansion in the past three years that could result in higher depreciation charges. So, higher interest costs should be the only other reason why growth in net profit has dipped sharply. Interest costs have been a consistent worry for Indian companies, as their balance sheets were over leveraged and interest cost were devouring their bottomline. Sales were reasonably strong until the past few quarters so as not to severely dent bottomlines. But now with sales too slowing down and companies unable to achieve productive gains from maximum capacity utilisation, India Inc’s bottomline has been hit the most in the quarter under review. With large companies neck deep in trouble, the plight of small and medium enterprises can only be imagined. With their cost of funds still higher, their condition can only get worse than their larger peers. Yet, concerns remain that the economic slowdown is not going to go away anytime soon. This means corporate India will remain under sustained pressure in the coming quarters. Aggregate numbers reported in this paper on Monday throw light on the real reason why the midcap index has been under pressure since the start of the earnings season.