Lehman Brothers filed for bankruptcy on 15 September 2008. During that quarter, the net profit of 379 companies that were part of the BSE-500 index saw a year-on-year (y-o-y) drop of 28%. In the December 2008 quarter, the same companies had posted a y-o-y fall in net profit of 23.76%. The erosion in profit (among those companies that have declared earnings thus far) has been greater in the September 2011 quarter at 37.3% y-o-y. In short, the erosion in companies’ profits has been more during the September quarter compared with the period after the Lehman collapse.
The story doesn’t change much with the exclusion of the oil companies, the earnings of which depend on the subsidy-sharing whims of the government. The 364 firms of the BSE-500, excluding the oil companies that have declared their results, have seen net profit fall 19.65% y-o-y. In contrast, these firms saw a 5.38% y-o-y rise in net profit during the September 2008 quarter and a 12.25% fall in net profit in the December 2008 quarter. Indian companies seem to be having a tougher time this time around.
Also See | Earnings Downturn (PDF)
The reasons aren’t difficult to find. Interest costs have shot up and commodity prices, which had collapsed in 2008, are higher. Many companies have reported foreign exchange losses. Perhaps more importantly, the government had the leeway to stimulate the economy through a higher fiscal deficit and was able to step in to offset the drop in private demand in 2008. Now, with a high fiscal deficit and the 10-year government bond yield nudging 9%, it no longer has that luxury.
Investment demand is now in worse shape than it was after the Lehman crisis. And analysts say that the bottom of the cycle hasn’t been reached, which means profit growth could continue to deteriorate in the next few quarters.
So far, however, most estimates of real gross domestic product (GDP) growth for 2010-11 range between 7% and 7.5%. In 2008-09, real GDP growth was lower at 6.8%. Do the corporate numbers indicate that GDP growth this year could slow even more than the revised estimates?
Graphics by Yogesh Kumar/Mint
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