Ourview | A poor quarter for companies

Ourview | A poor quarter for companies

The Indian corporate sector has had a savage September quarter, one of the worst in recent memory. The financial results released till now will add to the overall gloom in company board rooms.

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Also Read | Q2 Results ( Full Coverage )

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The fall in profits seems particularly precipitous because the previous September quarter was a record breaker, with the same 303 firms earning a net profit of 84,097 crore. But even the sequential numbers do not present a pretty picture. Corporate profits have been falling for four quarters in a row. In fact, the profits in the latest quarter are the second lowest since the March 2009 quarter.

These profit numbers would be less of a concern if companies were in the middle of an asset creation cycle, with higher depreciation charges eating into what is left over for shareholders. In such cases, one could argue that shareholders are being asked to sacrifice current profits for future profits. But that is not the case this time around. Most companies are sitting on cash, and too scared to invest given the global economic turmoil and the domestic policy tangles. The main blows have come from variable costs such as interest and raw materials. Operating profits are also under pressure.

It is hard to assess at this point of time whether the stress on cash flow and profits will eventually lead to a wider financial problem in the Indian corporate sector. The recent worries about growing bad loans with banks and problems in specific sectors such as power and airlines are indications of potential problems. But Indian firms seem to be in better financial shape than they were at the end of the 1990s, when high interest rates, a global commodity bust and slowing economic growth wreaked havoc in company balance sheets. In comparative terms, overall corporate leverage is at less dangerous levels and operating efficiency is higher.

The fact that profits have plummeted despite decent sales growth means that companies are losing their pricing power; they are finding it more difficult to pass higher costs to consumers. A loss of pricing power is often one indication that inflation is peaking. That’s perhaps the only silver lining we can see right now.

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