The stock markets have been bracing for a slowdown of the Indian economy for a while and now it is obvious that Dalal Street's fears were not unfounded. The growth story seems to be running out of fuel, as borne out by the performance of corporate India.
An analysis of the top 100 companies in the BT 500 is revealing. With income growth of little over 16 per cent and operating and net profit growth of 11 and 13 per cent, respectively, in the December quarter, there is little to cheer about. "The bumper quarters are behind us," says New Delhi-based Jagannadham Thunuguntla, Head of Equities at SMC Capital. "There is a squeeze on profit margins with competition scaling up."
For the 100 companies analysed, growth in raw material costs, at 17 per cent, in the quarter ended December outpaced income growth. Prices of key raw materials such as aluminium, rubber, coking coal, steel and iron ore shot up due to rising demand and supply constraints.
And analysts expect higher raw material costs to exert pressure on margins over the next few quarters as well. Generally, manufacturing companies hold only two month inventories and commodity prices have surged from December. A recent spurt in oil prices, which crossed $110 a barrel, due to unrest in West Asia, is adding to the woes. And to make matters worse, salary and wage costs for these companies grew by a whopping 29 per cent.
"We are playing a catch-up game," says Rakesh Arora, Head of Research at Macquarie Capital Securities India. The availability of skilled manpower is a serious constraint and that is putting pressure on corporate India's wage bill, he says. Gaurav Dua, Head of Research at Sharekhan, points out that many information technology, or IT, companies have given out-ofturn hikes to employees in the current financial year. "They did not build the necessary bench strength in the slowdown phase," says Dua.
Another problem for companies is rising interest expenses. For the top 100 companies, excluding banks, interest expenses saw a year-on-year jump of nine per cent in December 2010. "Companies which are leveraged are vulnerable to higher interest costs," says Thunuguntla.
According to a separate study on companies across 23 industries by CRISIL Research, a Mumbai-based independent research house, the revenue growth is expected to be higher on a year-on-year basis in the coming quarters, while operating profit margins are forecast to be lower. "Intense competition is limiting the pricing power of corporates and players are being forced to largely absorb the rise in input costs," explains Nagarajan Narasimhan, Director of CRISIL Research, in a paper released in mid-March. Input cost pressures, then, will be more pronounced in the current and ensuing quarters for Indian companies.
These pressure points for corporates are clouding the macroeconomic outlook for India. The Index of Industrial Production, or IIP, growth estimate for January 2011, at 3.7 per cent, was the third consecutive month of below four per cent growth. And at 8.2 per cent, gross domestic product, or GDP, estimate for the quarter ended December 2010 is lower compared to 8.9 per cent growth estimates for the previous two quarters of 2010/11.
The road ahead will be bumpy as well with the Reserve Bank of India, or RBI, expected to persist with a high interest rate regime. Policymakers, then, may settle for lower growth rates in an attempt to tame inflation. Finance Minister Pranab Mukherjee's nine per cent growth target for the Indian economy in 2011/12 may well be out of reach.