Corporate results for the September quarter have been dismal. As Mint reported a few days ago, net profit growth for the companies that comprise the Sensex and the Nifty indices has been the worst in many quarters. The results of a broader sample of companies show that profits have actually fallen during the quarter, compared with the year-ago period. Many firms have reported losses. Margins have contracted across the board.
Much of this was anticipated. For instance, there were few surprises in the huge losses of the oil marketing companies. But, even if we leave the oil companies out of the picture, earnings growth has been low. The slowdown has affected a wide swathe of industries, from automobiles to cement to auto ancillaries to information technology. There have been pockets of outperformance, such as in the consumer goods sector, but the overall picture is bleak.
Revenue growth has been strong, but that’s due not so much to volume growth as to rising prices. At the same time, input prices continued to be high during the quarter and that led to a squeeze in margins. Mark-to-market losses on foreign borrowing, as a result of rupee depreciation, lower “other income” and rising interest costs also hurt company profits.
Illustration: Jayachandran / Mint
Looking ahead, the slowdown is likely to deepen. The ABN Amro Purchasing Managers’ Index for October has shown sharply lower growth in both output and new orders. Export growth has dropped sharply in September and will likely fall even further as the weakness has spread to Europe and Japan. The guidance offered by IT services companies has been tepid. Overseas borrowing costs have seen significant increases and companies that have foreign loans are suffering because of the depreciation of the rupee. Companies that had issued foreign currency convertible bonds will be hit hard as stock prices have fallen to levels well below the conversion price. The real estate sector is in distress. Bad loans in banks have started to mount. While it’s true that input prices have fallen, most companies will find that they lack pricing power. The outlook for commodity companies is depressing.
In the circumstances, companies will need to tighten their belts to keep afloat during the downturn. At a time like this, it makes little sense for the government to exhort companies not to lay off employees or force banks to lend to distressed companies.
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