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Business News/ Opinion / Profits take a southern march
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Profits take a southern march

As political uncertainty rises, it is likely that investments will dry up further, and supply bottlenecks will continue to stifle growth

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

Corporate performance is likely have deteriorated further in the fourth quarter of the current fiscal, and the chances of a quick recovery appear very slim. This has implications for companies, the stock markets and tax collectors.

Profit margins of publicly-traded firms—excluding banks and oil companies—had already slowed to a three-year low in the December quarter, and are likely to slide further south in the March quarter, according to estimates by Crisil Research. Although some costs such as raw material expenses have fallen, others such as interest payments have increased, both because of elevated interest rates and higher debt burden of companies, crimping margins.

The biggest worry is the sharp fall in revenue growth over the past fiscal, which has likely been exacerbated in the current quarter. The average sales growth of firms in the BSE-500 in the April-December slowed to 6.7% compared with 18.7% in the year-ago period, according to Capitaline data. Excluding services firms, the performance has been even worse.

The muted growth of Indian industry reflects the slowing demand in the economy and weak pricing power of corporations. Most economic indicators point to an uncertain recovery. Credit growth hasn’t picked up, according to data from the Reserve Bank of India (RBI). Car makers are slashing production because of declining sales, and steel makers are unable to raise prices because of an inventory build-up and weak demand. Nomura Securities International’s composite leading index points to a “prolonged bottoming out, rather than a recovery", wrote economists Sonal Varma and Aman Mohunta in a recent note.

The chances of a significant improvement in corporate fortunes hinge on two crucial factors. One is commodity prices; a further softening will ease margin pressures. The second is inflation; a substantial fall will provide the Reserve Bank of India space for rate cuts, which will help improve corporate balance sheets and lower costs.

Yet, risk factors still outweigh the likely positives and will perhaps delay a structural U-turn. Despite policy moves to spur investments in the past few months, actual investments on the ground have not picked up pace. State-owned firms are unable to find large investment opportunities. The inability to solve structural problems relating to acquisition of resources such as land, and the unavailability of key inputs such as power have put a brake on private investments. As political uncertainty rises in the run-up to general election due next year, it is likely that investments will dry up further, and supply bottlenecks will continue to stifle growth.

What is needed to revive corporate growth? Tell us at views@livemint.com  

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Published: 28 Mar 2013, 05:52 PM IST
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