The slowing rate of growth in net sales and profits between the third (October-December) and fourth (January-March) quarters of 2006-07 is indicative of a slowdown in the frenetic rate at which Indian companies have been growing over the past few years, contributing their bit to an economy that has grown at 8% over the past three years, and which grew at 9.2% in 2006-07, according to government estimates.
One thousand and fifty-six Indian corporations—almost all the firms that had declared their financial results till Friday, 4 May—registered close to a 32% growth in their net sales and a growth of more than 47% in their net profit in the fourth quarter of 2006-07, ended 31 March. They represent about one-third of all listed entities on Indian bourses.
In absolute terms, the numbers show that despite hardening of interest rates and tightening monetary conditions (India’s central bank, the Reserve Bank of India, was especially active on both fronts in the January-March quarter), the corporate growth story is still intact.
However, if one takes a look at these corporations’ financial performance in the previous quarter (October-December), there are telltale signs of a slowdown. In the October-December quarter, the same 1,056 firms had registered a more than 38% growth in net sales and a close to 61% growth in net profit.
Bandi Ramprasad, a consultant with Dun & Bradstreet, an information services firm, said a 32% growth in sales and a 47% growth in net profit do not signify any slowdown. “This is in sync with a 8.5% growth in India’s gross domestic product (GDP) and 5% inflation rate that have been projected (for 2007-08). Things are fine,” he added. Not everyone is convinced.
“The growth story is still intact but the momentum is missing. Going forward, we will see a slowdown in corporate earnings,” said a fund manager with a foreign brokerage who did not wish to be named. The slowdown hasn’t surprised companies and brokerages that had been expecting it.
An RBI survey, which formed part of the central bank’s report on macro-economic and monetary developments, released in April, said business expectations for April-June had dipped as a lesser number of firms expect a rise in profit margin, production and working capital. Another survey, this one conducted late last year by industry lobby Ficci, said the outlook on investments and exports for the six months ending June 2007 was “less encouraging”.
The reasons behind this are an increase in the price of capital goods and the rising cost of credit and inputs. The central bank hiked its key lending rate by half a percentage point in two stages between January and March 2007. It has also tightened liquidity by raising the cash reserves that banks need to keep with it.
Around 1,075 firms had announced their results for the January-March quarter till Friday. However, this Mint analysis is focused on 1,056 firms as the comparable figures for all firms for the previous quarter are not available.
Even though there is a slowdown in the growth in net sales and net profit of the companies that form part of the sample, there has been a surprising acceleration in the revenue and earnings of the firms that constitute the Bombay Stock Exchange’s benchmark index, Sensex (compared to their performance last quarter).
The Sensex is a basket of 30 firms. Till 4 May, 19 of them had announced their quarterly results. The net sales of these 19 firms in the January-March quarter increased by almost 29% and their net profit by close to 40%.
This is lower than the overall growth in net sales and net profit of all firms that have announced their results so far. However, this is also a much better performance than that put up by this same set of Sensex firms in the previous quarter.
In the October-December quarter, these firms registered a growth of more than 21% in net sales and nearly 23% growth in net profit.
“This shows that there is no slowdown in the performance of the firms that move the Indian market,” said an executive at another Mumbai-based brokerage, who spoke on the condition of anonymity. Interestingly, last week, a Mint analysis showed that foreign institutional investors had cut their exposure by 0.15-4.31% in 20 of the 30 Sensex firms in the fourth quarter of 2006-07.