Overheating fears  hamper growth in 20 Sensex cos

Overheating fears  hamper growth in 20 Sensex cos
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First Published: Mon, May 14 2007. 07 39 AM IST
Updated: Mon, May 14 2007. 07 39 AM IST
New Delhi: The growth rate of India’s best-known listed companies’ sales and profit is slowing down, but analysts and fund managers are not worried for a variety of reasons that largely revolve around the estimated 8.5% at which the Indian economy will expand this year (2007-08).
Twenty blue chips, accounting for two-thirds of the 30-stock Sensex, the benchmark index of the Bombay Stock Exchange, have registered a 24.8% growth in net sales and a 34.6% growth in net profit in the January-March quarter as compared with the corresponding quarter of the previous year.
In the October-December quarter, the same companies had registered a 35.6% growth in net sales and 39.2% growth in net profit (compared with the October-December 2005 quarter). The 20 firms represent around 70% of Sensex by weightage. To date, 21 Sensex companies have released their results for the January-March quarter, but the Mint analysis considered only 20.
Reliance Communications Ltd is a new entrant inthe Sensex and was therefore excluded for the purposes of this analysis.
The reduced pace of growth in the quarter, the last for a majority of Indian firms that end their financial year in March, comes in the backdrop of increasing fears that the Indian economy is overheated. To curb wholesale inflation, which rose to a two-year high of more than 6.5%, the Reserve Bank of India increased a key lending rate twice, and also initiated a clutch of money-tightening measures.
Executives at brokerages and fund managers said the slowing pace of growth was not a cause for concern, yet.
“The numbers look very healthy despite cost pressures. This shows that the pricing power is still with the companies,” said Ketan Karani, vice-president, research, Kotak Securities Ltd, a Mumbai-based brokerage.
Companies were able to pass on any increase in their costs to customers in the January-March quarter, added Karani, but (they couldn’t do this all the time) and “there could be a slowdown soon.” That confidence is reflected in the results of a larger sampling of companies. The performance of the 20 Sensex firms trails that of 1,573 companies that had announced their results for the January-March quarter till the end of last week.
These firms grew their net sales 29% and their net profits 51% over the preceding quarter. And even the performance of the Sensex firms, according to D.K. Joshi, the principal economist at credit rating firm Crisil, is “growth moderation, not a recession.”
There will be more of that, said analysts, at least in sectors such as software and automotive. Prateek Agarwal, the head of equities at ABN Amro Asset Management (India) Ltd, said that sectors such as automotive and real estate that were sensitive to any increase in interest rates could see some slowdown.
“Software companies will feel the heat of cost pressures of increasing salary and the strengthening rupee (the predominant billing currency for software firms is the dollar),” said Kotak’s Karani.
One reason cited by most experts for their belief that the slowdown would be localized and only target a few sectors was overall economic growth. “As long as the GDP (gross domestic product) growth is 8% and above, there is nothing to be worried about,” said a fund manager with a large domestic asset management firm who did not wish to be identified.
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First Published: Mon, May 14 2007. 07 39 AM IST
More Topics: Money Matters | Equities |