A terrible third quarter

A terrible third quarter

The Centre for Monitoring Indian Economy, a research firm, predicts that the net profits of listed Indian companies will nearly halve in the third quarter of the current fiscal year, compared with the level a year ago. Net profit margins will also tumble from 6.5% to 3.3%. This means that shareholders will get far less than expected after their companies pay wages, interest, tax and keep money aside for depreciation. That could be terrible news for equity prices.

The exact numbers will be reported through January, which is when we will know whether this dire prognosis is correct or not. But there is little reason to doubt that the third quarter will be terrible for most companies. Most brokerages and investment banks are putting out reports that predict tough times ahead for Indian companies.

There are no prizes for guessing why the current quarter—which will end this week—will be particularly bad for companies. It was over the past three months that the financial crisis which began in the summer of 2007 finally rolled into the real economy of output and jobs. Economic growth has fallen off a cliff, exports have tumbled and consumer spending has shrunk in many countries. These storms are bound to hit Indian companies.

The recent drop in borrowing costs and commodity prices could help companies later on, but these happened too late to stem the profit erosion we are likely to see in the third quarter. The interest rate that banks charge has started sliding only in recent weeks. Commodity prices began falling earlier, but most companies stock up on at least a few months of inventory. So they could still be holding inputs bought at the height of the commodity price bubble.

The next year promises to be tough for the entire world, with the largest economies shrinking in unison for the first time since World War II. The extra spending that governments are promising will take several quarters to have an impact on final demand.

Indian companies will have another worry: their financial structure. Many are deep in debt that was taken on to fund expansions and global acquisitions. Currency and interest derivatives are other worries. These pressures could further strain company finances.

Will 2009 be even worse for Indian companies? Write to us at views@livemint.com