Global Outlook

Performance of Indian companies was not so great during the quarter

Contributed by Nirmal Bang

By Nirmal Bang

The quarterly results of companies are out and many market pundits are evaluating the performance. Prima facie, however, the quarterly results seem to have failed to cheer market participants. Though strong growth was witnessed in some pockets, the overall performance of companies was not so great during the quarter.

The year-on-year (y-o-y) growth numbers for different profit and loss items look very robust. One, however, should not forget that such growth has come on the back of a lower base. The December ’08 quarter (the so called base) was at the bottom of the commodity and the economic cycle. The performance of India Inc was really subdued during that quarter.

Having said so, one can’t rule out the fact that the upward growth trend still continues for India Inc. For instance, the analysis of around 2,200 companies (excluding companies from banking and oil & gas sector) that have declared their quarterly results reveals that the aggregate revenue of these companies grew at 13.7%, reckoned on a year-on-year basis. And this growth rate is one of the highest in at least last the eight quarters. And this is higher than the growth rate of 2% to 3% seen in the previous quarters.

Surely, there is an element of base effect embedded into such growth numbers. But there is also an improvement in demand, although marginally. For instance, sectors like auto, metal, cement and consumer goods are witnessing strong growth in demand for their products, thanks to the government’s stimulus plan.

Overall, the aggregate revenue grew by roughly 6% on a sequential basis and this growth rate is more or less similar to sequential growth in the previous quarter. It suggests that though there is no significant improvement in growth rate, the previous trend still continues. The manufacturing sector made a good comeback this time around. Unlike the last three quarters of the financial year, the manufacturing sector has outperformed the services sector, both in terms of topline and bottomline growth in the December ’09 quarter.

The government stimulus seems to be working very well for India Inc. Sectors like auto, metal and consumer durables took the lead for such robust growth. Capital goods, the sector that reflects corporate investment, has also started showing good results.

On the other hand, the services sector did not relatively perform remarkably well during the quarter ended December ’09. However, on a standalone basis, the sector has done well compared to previous quarters. For instance, 6.3% growth in its aggregate revenue is lower than 16% growth in the manufacturing sector but is higher than 0.7% growth seen in the previous quarters by services companies.

While the topline growth for Indian companies was modest, the bottomline grew at a disproportionately higher rate. For instance, the aggregate operating profit and net profit increased by more than half and two-thirds respectively, both reckoned on a year-on-year basis.

India Inc benefited immensely from lower operating expenses during the quarter ended December ’09. The aggregate raw material expenses, which accounts for little more than one-third of operating expenses, grew by a marginal 8.6% compared to the same period last year.

Several raw materials had a sharp rally in the last two to three months of CY09. In spite of such an upsurge, commodity prices are not as high as they were during the same period last year. The increase in finished goods prices has surpassed the rise in raw material prices when compared on a y-o-y basis. This, however, may not continue in the near future.

The economic slowdown had a negative impact on the job market in 2009. In the second half of CY09, companies have begun hiring again. The companies, however, are in no hurry to offer high pay packets.

As a result, employee expenses, mainly salary and wages, are still under control for India Inc. For instance, the aggregate staff cost of 2,009 companies grew at a tad 9%, much less than 14% growth in the case of revenue. This had a positive impact on the operating margin.

Even other factors like power and fuel add positively to the bottomline. The crude oil prices are still at a lower level compared to the same period last year. As a result, the power and fuel expense declined by a marginal 4% and this further boosted the bottomline growth.

The impact of all these factors expanded the operating margin by 310 basis points on a y-o-y basis to 22% in the December ’09 quarter. However, sequentially there is no change in operating margin indicating that less room is left for India Inc to take further cost control measures. In fact, many of the operating parameters mentioned earlier may have a negative impact in the coming quarters.

As far as the operating margin is concerned both manufacturing and services sectors performed in a similar fashion. In both cases the aggregate operating margin got squeezed by roughly 50 basis points.

Overall, it looks like there is no significant improvement in the operating performance of India Inc during the December ’09 quarter compared to the previous quarter.

The rising equity market came as a blessing for many Indian companies seeking to raise funds. This also helped companies to raise more equity and lesser debt. As a result, the interest burden was relatively lesser in this quarter.

The aggregate interest cost of India Inc declined by roughly 18% when compared to the same period last year. All these factors, operating and financing, had a strong impact on the bottomline of companies. The aggregate net profit of India Inc grew by more than two-thirds as compared to the same period last year.

However, like operating margin, there was no improvement in the net profit margin when compared sequentially. The third quarter of FY10 was in line with the previous growth trend, not much better though. However, many of the operating parameters are not going to have a very positive impact in the fourth quarter.

Prices of most industrial metals, barring steel, are already closer to their peak levels. Going by the recent trend, steel prices are likely to move upwards only.

Also, better job prospects are going to increase attrition rates across sectors. All these factors will increase the operating cost of the companies and this will put further pressure on the operating margins in the fourth quarter of financial year 2010.

It means that the maximum growth in earnings in the next few quarters will come from volume growth. Hence, going forward, it is demand that will play a much bigger role in the earnings growth of India Inc. The stock market is also factoring in this expectation.

A modest third quarter performance and modest demand in India has put many market participants in a wait-andwatch mode. Not surprisingly, the broader market indices like the Sensex have lost close to 7% in less than a month. Any future movement in broader equity indices has to be preceded by strong volume growth.

SECTORS THAT OUTPERFORMED

Metals

Metal companies performed well in the December ’09 quarter. Most companies in this sector managed to improve their profits substantially. In fact, bottomline doubled in case of companies like Tata Steel and Steel Authority of India (SAIL).

In case of steel companies, strong sales volumes triggered the robust growth. Non-ferrous companies on the other hand enjoyed the benefit of rising London Metal Exchange base metal prices during the quarter. Prices increased by two-folds from the year-ago levels.

Going forward, steel companies will continue to benefit from rising global steel prices. For non-ferrous companies, prices are less likely to rise further. Hence any future growth in earnings has to come in the form of volume growth, which is still not very strong.

Information Technology

Top IT players reported better-than-expected results for the third quarter. A strong volume growth of 6% to 7% and improved employee utilization were the key drivers for such impressive growth of this sector. Second rung players continued to witness a sluggish trend in demand. The scenario looks upbeat for the sector. Companies including Infosys and Wipro have guided for higher growth in the fourth quarter.

Also, top IT companies have resumed hiring to take advantage of future opportunities. The US clients are likely to resume spends on discretionary projects during the current calendar year. Also, overall IT budgets are less likely to see a further fall.

SECTORS THAT UNDERPERFORMED

Telecom

The December quarter results of Bharti Airtel and Idea Cellular reflect resilience in the backdrop of a sharp fall in tariffs during the quarter. Bharti reported a marginal fall in revenue whereas Idea posted a better-thanexpected rise in its topline.

Though both telcos reported lower profits during the third quarter due to over 8% fall in per minute revenue sequentially, the damage is well under control. Both telcos have been rationalizing cost structure to minimize the impact of the tariff war.

Telecom players may report a subdued performance in the next two quarters after which the base effect of lower tariffs would set in. Further, tariffs have most probably reached their bottoms and a further fall is not likely. This would bring about a stable performance in FY11.

Banks

Barring HDFC Bank, all top banks reported comparatively lower profit growth in the December quarter. This was due to the absence of trading gains and falling credit offtake. On the positive side, banks continue to retire high cost bulk deposit and accumulate more of low cost current and savings account (CASA) deposit, which improved the net interest margin (NIM). NIM is expected to improve for another quarter.

Also, credit growth was buoyant in January ’10. As per the latest data from the Reserve Bank of India (RBI), the growth in non-food credit stood at 14% as compared to 11% at the end of December ’09. Given this, most banks are expected to report a higher profit growth in the forthcoming quarter.