Sales growth back at India midcaps, but new woes ahead

Sales growth back at India midcaps, but new woes ahead

Mumbai / New Delhi: Even as a recovering economy has helped Indian midcap firms report a much-awaited jump in sales, they are staring at a new set of worries: inflation that could crimp margins and tax hikes, which may dent demand.

Of the 85 company results for the December-quarter polled by Reuters, almost two-thirds reported improved profits helped by an increase in sales, a contrast from earlier quarters when cost cuts and cheaper inputs were the main drivers.

Automobiles, auto ancillaries, metals, media and FMCG companies largely saw better profits boosted by higher sales.

“The larger trend is the growth in sales. But I’m now finding with the higher growth I’ve achieved, margins have dropped by a few basis points," said Arun Kejriwal, strategist at research firm KRIS.

The recovery comes amid sharp tax cuts and stimulus measures, put in place a year ago to boost confidence in Asia’s third-largest economy in the aftermath of the economic turmoil. But with data indicating the economy is back on the growth track and with fiscal difficulties looming ahead, rolling back these measures is only a matter of time, analysts say.

“If they’re talking of high (economic) growth, you can’t justify stimulus," said Ambareesh Baliga, vice president of Karvy Stock Broking. “From the noises that are coming, it seems the stimulus will be rolled back in the budget itself."

Finance minister Pranab Mukherjee will present the budget on 26 February, less than a month after the Reseve Bank of India (RBI) upgraded its forecast for the economy to grow 7.5% in 2009/10 from 6% earlier.

Fiscal woes

But during its quarterly policy review on 29 January the central bank warned of higher inflation and the need to trim high fiscal deficit and government borrowing.

India’s fiscal deficit, estimated to touch 6.8% of the gross domestic product for 2009/10, could widen on slack tax receipts and as delays in the 3G wireless spectrum auction holds back revenue inflows.

“The fiscal deficit is going up. The 3G auction has been deferred and the government is under serious pressure to control the deficit," said RK Gupta, managing director at Taurus Mutual Fund, which manages assets worth Rs19 billion.

“Indirect taxes — customs and excise — which they had reduced, may be hiked in a phased manner."

And the industry’s travails are far from over, say analysts.

Raw material prices are on the rise after a benign 2009, interest rates are hardening and record-high food prices could spill over to the broader economy and force firms to hike wages, hammering away at profit margins, they say.

The benchmark 30-stock BSE index is down 7% since it opened on 12 January, when IT bellwether Infosys Technologies inaugurated the latest earnings season. The index rose 8% in 2009, its best since 1991.

Other signs of the economy’s robustness like rising exports and a quickening in the pace of manufacturing growth further weaken the case for continuing the stimulus, posing fresh challenges for companies in coming quarters.

Inflation is projected to touch 8.5% by end March, setting the stage for higher interest rates. The RBI held steady its key rate during its policy review, but its moves to siphon off liquidity have led watchers to bet on a rate hike by April.

High inflation could tighten household budgets and dent demand for goods like cars and consumer durables, which have seen a recent spurt in sales, analysts say.

Firms would have to build up efficiencies in their processes and continue with cost cuts to ride the storm, they said. “There is going to be (cost) tightening as far as margins are concerned. The squeezing will go down the supply chain," KRIS’ Kejriwal said.