The profit slowdown

The profit slowdown
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First Published: Tue, Feb 05 2008. 09 28 AM IST

Updated: Wed, Feb 06 2008. 02 47 PM IST
Each weekday during the earnings season, Mint publishes a log on the front page. It tells readers what the corporate results that have been announced till then are adding up to.
The news this time around is sobering. As of 2 February, 2,203 of the 3,650 companies tracked by us had reported quarterly unaudited numbers. Their net sales in the October-December quarter grew at an annualized rate of 18.82%. Net profit grew at 17.32%. This is almost half of what it was in recent quarters and perhaps the slowest rate in two years.
It’s a clear sign that Indian companies are moving into a lower gear. This is not surprising in itself. The rest of the economy, too, is gradually slowing and companies are marching in step with it. Other macro indicators such as growth in bank credit and business confidence indices also show that the economy is decelerating. With global growth in 2008 expected to be several notches below what it was in 2007, the slowdown in profit growth could continue into the next few quarters.
The latest numbers are not alarming by any measure. Indian companies are in the pink of health and in a far better position to weather a global perfect storm than they were in 1997, when the Asian crisis wrecked their balance sheets.
The fact that sales have grown faster than profits suggests that margins are under a bit of pressure. Interest costs have climbed as companies have started leveraging their balance sheets by stepping up their borrowing. Credit quality has deteriorated a bit as well. All this is not unusual at this stage of the business cycle, when companies are stepping up their investments in new capacities. But these are early warning signs on the horizon. They cannot be ignored.
Equity investors, too, would do well to take a close look at the corporate performance charts. Standard and Poor’s and Citigroup say that the forward price-earnings multiple for India at the end of January was 21.57%, making India one of the most expensive markets in the region. That also broadly means that investors expect Indian corporate profit to grow at 21.57% in the future. The latest numbers suggest that this expectation is a bit too optimistic. Thus, valuations at the end of January too were a bit stretched. There is little doubt that companies in India are likely to grow at a quick clip, but perhaps not as fast as many believe.
(Are Indian companies in the midst of a mild slowdown? Write to us at views@livemint.com)
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First Published: Tue, Feb 05 2008. 09 28 AM IST
More Topics: Net sales | Net profit | Growth | India | Views |