Mumbai: The ongoing economic slowdown, coupled with the revelation of financial misdeeds at Satyam Computer Services Ltd, has resulted in the firms that constitute India’s two benchmark indices reporting their first ever decline in profit growth in 12 quarters.
A Mint analysis of results for the quarter ended 31 December showed that firms in the Bombay Stock Exchange’s 30-stock Sensex collectively posted a 6.53% year-on-year decline in net profit, their worst showing since the March 2006 quarter, when earnings fell by 0.9%.
Profit at firms in the broader 50-stock Nifty on the National Stock Exchange (NSE) fell 9.85% in the three months to December. Barring Jaiprakash Associates Ltd, all Sensex firms are also part of Nifty.
Also See Falling Profit (Graphic)
During the October-December quarter, the Sensex lost 24.98%, from 12,860.43 to 9,647.31; Nifty lost 24.53%, from 3,921.2 to 2,959.15.
“There is a crisis of confidence,” said Waqar Naqvi, CEO of Taurus Asset Management Co. Ltd, which manages about Rs213 crore. “People are expecting worse results in March and the markets have already factored this.”
“There is a structural slowdown in the economy,” said Nitin Khandkar, vice-president (research) at Keynote Capital Ltd.
Some analysts suggest that the fraud at Satyam, whose chairman B. Ramalinga Raju confessed to inflating the books by Rs7,136 crore, may have put the fear of an accounting god into companies, making them come clean on such issues as postponing booking of losses. “I can sense some amount of pain due to Satyam,” said Raamdeo Aggarwal, joint managing director of brokerage Motilal Oswal Financial Services Ltd. “Everyone has declared everything and no one seems to have postponed booking losses in forex, inventory etc.”
Revenue growth was also the lowest in at least 12 quarters for both Sensex and Nifty firms. The combined net revenue for Sensex companies grew by 3.86% for the quarter ended 31 December, against 16% for the corresponding period a year ago.
However, net profit for the firms increases marginally if one excludes oil firms from the mix, considering that their performance is affected—in this case, downward—by volatile global crude prices and a subsidy-sharing mechanism laid down by the government.
If the two oil companies in the Sensex—Reliance Industries Ltd (RIL) and Oil and Natural Gas Corp. Ltd (ONGC)—are excluded, earnings growth for companies in the index would be up 0.85%.
For the purpose of this analysis, earnings of 27 Sensex firms and 40 Nifty companies available for the past 12 quarters were looked at. DLF Ltd, ACC Ltd and Reliance Communications Ltd were excluded from the Sensex and Reliance Petroleum Ltd, Reliance Power Ltd, Ambuja Cements Ltd, ABB Ltd, Cairn India Ltd, Idea Cellular Ltd and Power Grid Corp. of India Ltd were excluded from the Nifty since comparable figures over the past 12 quarters were not available for these firms.
Of the 27 Sensex companies, 14 firms reported losses for the December quarter, twice the number that did so for the quarter ended 30 September.
The tidings for the coming two quarters are not too good, either. Analysts and fund managers express doubt about performance as an ongoing liquidity crunch shows no sign of abating despite policy rate cuts by the Reserve Bank of India (RBI).
Since October, shortly after the global financial system froze following the collapse of investment bank Lehman Brothers Holdings Inc., the central bank has cut its repo rate, or the rate at which it lends to banks, by 350 basis points to 5.5% and the reverse repo, the rate at which it soaks up excess liquidity, by 200 basis points to 4%. None of those measures, though, seemed to have restored confidence in the financial system.
“Interest costs have risen sharply,” said Hitesh Agarwal, head of research at Angel Broking Ltd. “I don’t expect the current cuts (by RBI) to reflect in rates for the next two to three quarters.”
Meanwhile, the growth outlook for the economy has faded. Financial services firm Morgan Stanley recently pegged India’s growth for fiscal 2009 at 4.3%, down from an earlier 5.3%. In its recent macroeconomic review, RBI also shaved its estimate for economic growth for the current fiscal from 7.5-8% to 7% with a “downward bias”.
Graphics by Sandeep Bhatnagar/Mint