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Business News/ Opinion / Online-views/  Revenue gains, profit pains
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Revenue gains, profit pains

Revenue gains, profit pains

Yogesh Kumar/MintPremium

Yogesh Kumar/Mint

By all accounts, the fourth quarter (Q4) earnings season, which starts next week, will be a spillover from the three months ended December.

Macroeconomic indicators show Indians are still shopping. Consumer goods grew 11.3% over a year ago, the January Index of Industrial Production (IIP) numbers showed. The Purchasing Managers’ Index points to the output growing at a healthy pace.

Indeed, an HSBC Holdings Plc report on Q4 notes that “of the largest emerging markets, India recorded by far the strongest growth (in output), with expansion reaching a three-quarter high". In other words, expect revenues to continue growing at a healthy pace.

At the same time, these very reports also indicate that inflation continued to hurt. “A series record increase (in input prices) was recorded in India," said the HSBC report.

Yogesh Kumar/Mint

However, that doesn’t say anything much. It is dependent on which end of the commodity supply chain a company is placed. As prices of raw materials increase, commodity sellers are likely to benefit and commodity users suffer.

Thus, India Infoline Ltd forecasts that the commodity companies under its coverage will see profits grow by an average 20%. Similarly, Edelweiss Capital Ltd expects metal sellers to see an increase in profit and realizations. The key question is whether this kind of revenue growth will sustain, especially since the base effect has all but disappeared?

One indicator to pay particular attention to then would be the order books of firms in construction and infrastructure. Recent news flow suggests there is a pickup in contract awards in roads and power sectors, to name just two. Investment growth has seen a slowdown in recent times. Even intermediate goods production was slowing down as of January, IIP data showed.

The concerns that were there three months ago haven’t gone away. Commodity prices, especially oil, haven’t cooled down that much, despite China’s hike in interest rates. While the Reserve Bank of India and the government expect overall inflation to cool down by June, core inflation is still high and the central bank is still hawkish.

The consensus view is that growth is likely to slow down if the current inflationary pressures sustain and interest rates are increased further. This build-up in margin pressures and a moderation in growth could well mean a round of downgrades after the Q4 results.

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Published: 07 Apr 2011, 11:36 PM IST
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