India’s economy may be growing in excess of 9% per annum, but the first signs of overheating are being seen in the dropping expectations for corporate profits and sales.
Brokerages and investors are lowering expectations of revenue growth from around 30% in the year ending 31 March to around 20% in fiscal 2007-08. Profit expectations are also being cut from almost 35% to15%, reversing a trend of recent years where profit growth outpaced sales increases.
“We expect the top 200 companies in India to post a 14% bottom line growth in 2007-08 even as the sales will grow much faster,” says A.K. Sridhar, chief investment officer, UTI Asset Management Pvt. Ltd.
Rising interest rates, including Friday’s Reserve Bank of India hike that have pushed key rates to fourand-a-half-year highs, up almost three percentage points; a 100-300% rise in property prices across many cities in the last two-and-a-half years, and salary hikes, which put India at the top of Asian countries for wage increases are all expected to put the brakes on profit growth.
One consolation: thanks to a booming economy, driven by the manufacturing and service sectors, sales growth is expected to be double that of the gross?domestic?product?growth.
Even then, not everybody is expecting profits to fall in fiscal 2008.
Says Adi Godrej, chairman of the Mumbai-headquartered Godrej Group, “clearly costs are rising but so is productivity. Even in this year, costs have risen but profits have risen faster. So we expect corporate profits to remain strong.”
With capacity utilization at a record high across companies, the scope seems somewhat limited for boosting earnings through higher volumes without making fresh investments in expanding capacity.
“Future growth in revenue will come at a price,” says Mukarram Bhagat, managing partner, ASK Raymond James & Associates, who fears that a continuous rise in interest rates could also result in demand contracting.
“There will be a slight slowdown of demand, but perhaps higher-end consumer durables like refrigerators and air conditioners are more likely to be affected than brown goods,” says Shekhar Bajaj, chairman and managing director, Bajaj Electricals Ltd.
Given the large debt-funded acquisitions by many Indian companies, consolidated profits may actually fall, as the benefits of the much larger acquisitions take time to filter in. Many of the acquired companies are not only much larger than the Indian ones, they also have much lower profitability than the new Indian parent.
While Indian companies may not provide a positive earnings surprise, as they did in the current year when 20 of the 30 Sensex companies outperformed consensus profit expectations, not all sectors may be equally impacted.
“The slowdown in the US will benefit Indian IT companies,” says Aditya Vora, managing director of Mumbaibased brokerage ULJK Securities Pvt. Ltd. “Sugar companies will benefit from an expected doubling of exports in the context of the export subsidy which has been introduced. We are also positive on the metals sector as we feel aluminium prices will strengthen and zinc will see strong demand. We are also bullish on the auto sector.”
“Sensex heavyweights like Reliance Industries, ONGC, Bharti Airtel, Reliance Communications and Infosys should all report earnings growth of 15-20% in the coming fiscal year,” says Ketan Sheth, director, Way2Weatlh Securities Pvt. Ltd.
Krishnan L. Swami, group chief financial officer of Mumbai-based capital goods company Batliboi, says that sales and profits for the industry should grow by 25-30% and 45-50%, respectively.