Mumbai: The net profit of 90 companies that declared their third-quarter financial results last week grew at the slowest pace this fiscal year, hinting at the depth of the economic slowdown. Experts warn that even worse is in store.
A Mint analysis of the results for these 90 firms—including three that are part of the bellwether Sensex index—shows that net profit growth in the three months ended 31 December plunged to an average 4.61% from 32.97% in the year-earlier quarter.
Also See Slackening Pace (Graphic)
This is the slowest growth rate for this group of companies in the current fiscal, and only marginally better than that for the first quarter of calendar year 2008 (last quarter of fiscal 2008).
For the first two quarters of the current fiscal, net profit had grown 29.79% and 23.27%, respectively, over the corresponding periods at the 90 companies. However, the first quarter of calendar 2008 had seen a steep decline in profit growth to 4.4%, coinciding with the fall in markets and rising oil and commodity prices.
Slowing domestic and international demand in the face of a global recession and tight credit conditions are forcing companies to slow investment. After averaging 8.9% over the past four years, India’s economic growth is expected to decline to as low as 7% by government estimates.
“The bad mangoes are at the bottom of the basket,” said Vinod Kumar Sharma, head of research at Anagram Securities Ltd, of the quarterly results. He said worse results are in the offing and it is difficult to predict a turnaround before the March and June quarters.
To be sure, the companies that have reported results are a small sampling of the 3,000 or so firms listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange. Some of the biggest, such as Reliance Industries Ltd, ITC Ltd and State Bank of India, are expected to publish their financial results this week.
To fend off a liquidity crunch and bolster growth, the Union government and the Reserve Bank of India (RBI) have moved in tandem, cutting interest rates aggressively and releasing two instalments of a fiscal stimulus package. But economists and analysts see more months of gloom as demand weakens.
“Private consumption will suffer due to tightening in lending norms and a weakening job market,” economists Chetan Ahya and Tanvee Gupta of Morgan Stanley wrote in a 12 January report. “Building in weaker domestic as well as external demand, we are cutting our GDP growth estimate for 2009 again to 4.3% from 5.3%.”
Combined net sales growth for the companies reviewed was 32% for the quarter, slower than the 53% and 43% increase in the two previous sequential quarters, respectively. Operating margins of these firms, however, grew 37% for the quarter ended December.
“This can be attributed in parts to the commodity price collapse,” said Hitesh Agarwal, head of research at brokerage Angel Broking Ltd. Also, the data that Mint reviewed includes treasury income of banks and financial companies under operating profits. Treasury income, or income from investments, is usually treated as one-time income.
In the third quarter of this year, banks’ treasury incomes rose as yields on bonds fell after RBI cut rates in quick doses to fend off a credit crunch. Bond yields and prices move in opposite direction.
Further down the income statement, however, higher interest costs, midway depreciation expenses for some companies and loss of tax cover for some others meant that profit growth is far lower than operating profit growth.
“The effective tax rate is increasing in some companies because they are gradually losing the tax shield,” said Deepak Jasani, head of retail research at HDFC Securities Ltd. “Interest costs are rising because of high working capital requirements that have arisen out of higher inventories and debtors taking a longer time to pay up.”
Interest costs for these 90 companies have surged by 59% as they bear the brunt of higher interest rates and a bigger debt burden, driven by banks’ reluctance to lend. Depreciation has increased by 17% as many firms are in the middle of the expansion plans they are pursuing.
In the face of such depressed conditions, analysts do not expect RBI’s recent measure to ease liquidity to reflect on profit and loss statements before the next financial year. Since October, RBI has cut its key rate, the repo rate at which it infuses liquidity, by 350 basis points, the reverse repo, or the rate at which it drains liquidity, by 250 basis points, and the cash reserve ratio, or the percentage of deposits that banks keep with it, by 400 basis points. One basis point is one-hundredth of a percentage point.
Meanwhile, all the three BSE Sensex firms to announce their results so far—Infosys Technologies Ltd, HDFC Bank Ltd and Tata Consultancy Services Ltd—posted double-digit profit growth in the December quarter. Of all the companies reporting so far, 28 have posted a loss compared with 13 in the year-ago quarter.
Many companies in sectors such as autos and commodities, for which analysts expect the sharpest profit decline, are yet to post their results and a clearer picture is expected by the end of the month when almost all Sensex and Nifty firms declare their earnings.
Bajaj Auto Ltd posted a 23% profit decline from the previous year, but beat analyst expectations nonetheless. Jet Airways (India) Ltd, which has been hammered by falling passenger demand amid higher ticket prices, posted a loss of Rs214 crore, more than the Rs91.12 crore for the same period the previous year, but less than the Rs384.53 crore loss for the quarter ended 30 September.
ITC Ltd, the tobacco-to-hotels conglomerate, will announce its earnings on Monday, while Ranbaxy Laboratories Ltd, the largest Indian pharma company by revenue, will post its results on Thursday. Reliance Industries, the country’s largest company by market capitalization, will report its earnings, too, on Thursday, followed by the country’s two largest banks State Bank of India and ICICI Bank Ltd on Saturday.
Graphics by Sandeep Bhatnagar / Mint