Mumbai: Indian companies are witnessing a drastic slowdown in net sales and profit growth rates, both falling to their lowest levels in seven quarters on the back of a significant increase in interest costs.
A Mint analysis of 1,170 companies, for which numbers are available for the December quarter and the corresponding quarter of 2006 shows that profit growth has dropped to 14.49% and net sales growth has fallen to 15.85% from 59.64% and 29.93%, respectively. The burden of interest cost on this set of firms grew by 47.91% for the December quarter from the year-ago period—its highest growth rate in the last eight quarters that Mint tracked.
Reserve Bank of India (RBI) governor Y.V. Reddy left key policy rates unchanged in the central bank’s quarterly review of the monetary policy on Tuesday, but admitted that there was a “moderation” of industrial production, corporate sales and profitability.
WRITING ON THE WALL (Graphic)
Mint did not take into account the results of banks and financial services firms because fees and commissions, which are operational items, are shown as “other income” in their financial results. In contrast, other income for manufacturing firms and those in the services sector relate to one-time extraordinary income such as sale of assets. Oil and gas firms have also been excluded from calculations as their profits tend to be volatile, depending on government subsidies.
R. Ravimohan, managing director and regional head, Standard and Poor’s, South Asia, says interest rates should moderate in 2008. “In 2007, we had the impact of tightening of the monetary policy and interest rates were increased. In 2008, fund flows will be a lot more comfortable and I expect the interest rates to moderate.” According to him, RBI does not necessarily need to cut the policy rate as banks can bring down the lending rates on their own, as Reddy had suggested they do.
“There is a definite impact of rising interest costs on companies’ results, but this has to be seen in conjunction with the quantum of capacity expansion that is happening and the debt which is required to fund this expansion,” says Anjan Ghosh, general manager, Icra Ltd, an affiliate of Moody’s Investors Service.
“There is a slowdown in growth, but (this) is specific to certain sectors like cyclical commodities, IT industry and other export-oriented sectors,” Ghosh says, adding that the impact of interest costs is more pronounced in interest rate- sensitive industries such as automobile makers.
On a sequential basis (the performance in the December quarter compared with that in the September quarter), the net sales growth of the 1,170 firms fell by only 37 basis points, but their adjusted net profit growth fell by about 10 percentage points, from 24.48% to 14.49%. This is because the growth in interest costs, during the quarter, jumped by more than 28 percentage points from the September quarter, from 19.50% to 47.91%.
These figures include the results of 17 firms from the Sensex, the benchmark index of the Bombay Stock Exchange. These 17 firms saw their adjusted net profit growth rate fall to 11.87% in the December quarter, significantly below the 41.15% they had achieved in the corresponding year-ago period. The profit was also down by almost 20 percentage points on a sequential basis from the September quarter.
Net sales growth for these 17 firms was 19.43% for the December quarter of the latest fiscal, compared with 31.56% in the comparable period last fiscal. These firms witnessed only a slight decline, however, in the net sales growth on a sequential basis from the September quarter, when the growth rate was 19.63%.
Interest costs remain the defining factor, even for the 17 Sensex firms. Interest costs for these firms has grown to 135.95% in the December quarter, compared to a year ago. This compares with a decline of 1.31% in the year-ago period and a growth of 4.73% in the September quarter of 2007 fiscal.
“Interest outgo was higher during the quarter because many companies are in an expansion phase,” says Hitesh Agrawal, head of research at Angel Broking Ltd, a domestic brokerage. According to him, following the latest interest rate cut by the US Federal Reserve, it becomes all the more likely that RBI would cut rates in April when it announces its annual monetary policy. “The scenario demands a rate cut, which could be a token 25 basis points cut,” he adds. Agrawal expects most sectors, barring metals and cement, to continue to do well next fiscal.
There are others who feel the slowdown is a global phenomenon and India cannot escape from that. Ketan Karani, vice-president with Kotak Securities Ltd, an Indian brokerage, is one of them. “The slowdown is happening around the globe and is not India-specific,” he says. Apart from the rising interest rate burden, he also blames the growing input costs for the slowdown. “If you look at raw material costs, employee costs and interest costs, they are all beginning to bite into corporate profits.”