Mumbai: Corporate India’s earnings growth has slowed down significantly if the performance of the first set of firms that have declared results for the April-June quarter is any indication. But analysts are not surprised and say that the base effect is finally caching up with companies that have been growing at a very healthy pace in the past years. The base effect is a term that refers to the fact that as companies grow bigger in terms of revenue and earnings, their ‘base’ for these numbers grows, making it difficult for them to continue to grow at the same pace they previously did.
The growth in net sales of 61 companies that announced their results for the April-June quarter (the first for most companies) last week has dropped from 38.7% in the April-June quarter of 2006-07 to 15.15% now even as their adjusted net profit rose from 33.77% to 38.29%.
However, on a sequential basis (the performance in the April-June quarter on the January-March quarter), the group of 61 firms’ net sales actually dropped by 0.26% and their net profits, by an even more significant 14.75%.
The group of 61 firms may not necessarily represent the big picture since it includes only three stocks that are part of the Bombay Stock Exchange’s benchmark 30-stock index, Sensex, Infosys Technologies Ltd, HDFC Bank Ltd and Bajaj Auto Ltd.
If one takes into account the performance of only those firms with revenue above Rs100 crore for the quarter, the slowdown is more emphatic. The net sales of 21 firms with over Rs100 crore in revenue for the quarter grew 13.78% in the quarter against 38.07% a year ago. On a sequential basis, their net sales dropped by 0.59%. In terms of net profit, this set of firms showed a growth of 38.29%, higher than 33.77% a year ago. On a sequential basis, however, the net profit of these 21 firms declined 16.16%.
Equity analysts and brokerages are not surprised by the trend. “Growth in percentage terms is bound to come down in the long run as the base goes up,” says Anand Rathi, chairman of Anand Rathi Securities. “As Indian companies grow larger, it is harder to sustain the same pace of growth. A quarter-on-quarter growth of 15% to 20% for top line and around 25% for bottom line can be considered good growth figures in the Indian context,” he adds.
Rathi is not alone in believing that the base effect will catch up with Indian firms sooner than later. V.V.L.N.Shastri, country head of Firstcall India Equity Advisors Ltd, says that people should no longer look at growth in percentage terms. “If we looks at the quarterly growth in absolute terms, almost all the Indian companies have shown excellent performance,” he adds. “Our notion about 35-40% growth on corporate earnings is dim-witted. We need to be realistic. In the global scene, 15% growth is considered good,” says Shastri.
Sanjeev Gupta, managing director of Nexgen Capitals Ltd, part of SMC, a Delhi-based boutique financial services firm, says that despite the falling revenue, Indian companies are becoming more efficient.
“The profit margins of these companies are growing even though there seems to be a decline in turnover. This indicates that the efficiency of these companies is on the rise though the demand for their product or service has gone down,” he adds.
Among the three Sensex stocks, Infosys’ net profit in the quarter ended June rose by 28.66% as compared to the April-June quarter of 2006-07 and net sales by 23.86% even as the company pared its future earnings forecast. HDFC Bank’s net profit rose by 34.24% in line with market expectations. However, Bajaj Auto’s adjusted net profit was down 17.28% while net sales declined by 4.25%.
Delhi-based financial institution IFCI posted a net profit of Rs246.86 crore in the April-June quarter against a net loss of Rs15.61 crore in the corresponding quarter of 2006-07. Excluding this firm from the lot of 21 will make the trend of slowing revenue and earnings even more pronounced.