Business Today

The slowing gravy train

While India Inc. had managed to avert a sharp deceleration in its topline and bottomline growth in the first three quarters of fiscal 2008, it’s the last quarter that perhaps gives a clear picture of where they are headed. Hit by higher input prices and interest rates, corporate earnings growth was down sharply in the last quarter of 2007-08. Now with derivatives losses growing, India Inc. faces anxious times ahead.

Rishi Joshi        Print Edition: June 1, 2008

It’s now apparent that the Indian economy is slowing down. Most economists peg the growth estimates for the economy at about 8 per cent. This is largely seen as a fallout of two factors. For one, the central bank has maintained a tight monetary policy over the last year to keep inflation on a tight leash. The concerns were that the Indian economy (particularly manufacturing) was overheating. For another, there are global concerns over what appears to be the onset of recession in the US. This would impact our exports adversely.

While India Inc. had managed to avert a sharp deceleration in its topline and bottom line growth in the first three quarters of fiscal 2008, it’s the last quarter that perhaps gives a clear picture of where they are headed. An analysis of 258 companies in the BSE 500 that had declared results at the time of going to press clearly shows that corporate India is feeling the heat. Growth in net sales, gross profit and net profit has slowed down noticeably in Q4 (see Feeling the Heat) compared to the results in the corresponding quarter of fiscal 2007.

For the entire fiscal, too, there has been a slowdown but clearly the last quarter numbers have been the worst in recent times (PAT growth rates have come off sharply during the quarter). Says Ashok Jainani, Head-Research, Khandwala Securities: “We believe the results are the outcome of several factors. Both sales and profits have been hit by higher financial (interest) costs and rise in raw material prices. Bottom lines have been further impacted due to losses on account of currency derivatives and higher depreciation charge due to capital expenditure.”

And none of these factors, except perhaps the last (losses in currency derivatives) can be wished away any time soon. So, how did some of the key sectors perform and what’s in store for them? Here’s a quick look:

Auto: Gradient ahead

For the auto sector, it has been a bad quarter. Rising raw material prices impacted profit margins even as volume growth was hit due to high interest rates. For the eight auto companies that were part of our sample of 258 companies, net sales in the fourth quarter of 2007-08 were up 9 per cent (compared to 28 per cent in Q4, 2007), while PAT actually shrank by about 2 per cent (compared to 12 per cent growth in Q4, 2007). Volumes have been impacted as well. Passenger car sales, which grew by 13 per cent between April and December 2007, rose by only 6 per cent in the fourth quarter.

 Why it’s hurting

  • Interest rates have risen, pushing up cost of funds

  • Commodity prices are rising, eating into profit margins

  • Near-recession in the US has hit exports, including IT companies

  • A stronger rupee vis-à-vis the US dollar has shrunk export earnings

  • A slowdown is visible in the domestic market, particularly in manufacturing
The slowdown in commercial vehicles (CV) sales continued with a growth of 1.2 per cent in Q4 2008, compared with a 3.6 per cent increase in April-December 2007.

These factors were reflected in the results of automobile giant Maruti Suzuki, whose net profit margin declined significantly (also an outcome of the change in depreciation policy). Overall, it posted a decline of 34 per cent in net profit in the quarter. Sales also remained sluggish.

Maruti sold 202,225 vehicles in the January-March quarter, up only 1 per cent. Says Ajay Seth, CFO, Maruti Suzuki: “There has been a clear demand slowdown. We see demand picking up over this fiscal unless interest rates harden further.”

Two-wheelers, too, have been impacted. Sales of two-wheelers continued to decline due to a drop in demand for motorcycles. Sales were down 12.5 per cent in the latest Q4 compared to a decline of 7.7 per cent in April-December 2007. However, the world’s largest manufacturer of two-wheelers, Hero Honda Motors, managed to buck the trend to report robust fourth quarter numbers, posting a 53 per cent growth in net profit (sharp cut in promotional expenses helped shore up margins) and a jump of 3.28 per cent in quarterly sales.

Banking: Derivatives Danger

It’s a sector that delivered the goods in the last quarter. Overall net sales and PAT were up a healthy 29 and 32 per cent (compared to 34 and 38 percent in fiscal 2007), respectively.

 
Click here to enlarge
Most of the large cap banks seem to have beaten consensus estimates. HDFC Bank’s net profit was up 37 per cent, ICICI Bank’s 39 per cent and SBI’s was up 26 per cent, driven by growth in net interest and fee-based income. Banks have reported higher current and savings account deposits, as need for funds have decreased. Net interest margins in general were intact.

Although there were some provisions made on account of derivatives losses made by their clients, the magnitude of such losses is insignificant.

Analysts, though, sound a note of caution. Says Gaurav Dua, Head-Research, Sharekhan: “Feebased income might moderate for banks going forward. It then might be difficult for banks to sustain this earnings momentum.”

FMCG: Looking good

FMCG companies had a productive quarter. Higher volumes allowed most firms to record impressive results. Revenue grew 19 per cent in the quarter (compared to 20 per cent in Q4 2007) while net profit was up 25 per cent (compared to 28 per cent in Q4 2007). All frontline companies reported double-digit growth in sales. Price hikes allowed companies to absorb higher input costs and even improve on their margins. Says Morgan Stanley in a report: “Despite input cost pressures, most companies were able to expand gross margins via judicious price hikes and prudent purchase management.”
For example, Hindustan Unilever, India’s largest FMCG company, grew its net sales by 19 per cent, one of the highest in the last eight years, along with margin expansion in its home and personal care business. Nestle also had a good quarter. Higher product prices allowed the company to expand operating profit margins and record strong topline and bottom line growth—net profit was up 47.67 per cent to Rs 160 crore while net sales grew more than 26 per cent to Rs 1,090 crore.

For the FMCG companies, clearly, the increase in purchasing power of Indians is proving to be a boon. Says Martial Rolland, CMD, Nestle India: “The economic environment continues to provide support to our business.”

IT: Double whammy

The quarter was extremely challenging for the IT companies, which are grappling with a near-recession in the main market for their exports, the US. The Top 5 IT majors (TCS, Infosys, Wipro, Satyam and HCL) together showed 34 per cent Y-o-Y growth in dollar terms (23 per cent in rupee terms) in the January-March quarter, but crucially margins were under pressure. EBITDA margin has declined by 140 basis points over the last year at 23 per cent. PAT growth in the quarter was also flat (up marginally) impacted by lower non-operating income, foreign exchange losses and higher tax provisions.

On a sequential basis, too, most of the frontline companies declared poor growth numbers. Infosys saw a PAT increase of 1.46 per cent QoQ while total revenues were up 6.35 per cent. TCS actually reported a sequential decline in net profits of 6 per cent even as revenues were up 3 per cent. Says Som Mittal, President, Nasscom: “There is a definite impact of the US slowdown. The outlook for the next couple of quarters is uncertain and would depend on how the situation in the US unfolds. Meanwhile, companies are trying to scale up operations in other geographies like continental Europe and Asia as a natural hedge.”

Telecom: Jingle all the way

Telecom companies had a good quarter driven by a robust growth in subscriber base. Net sales were up a healthy 29 per cent, while PAT expanded by 20 per cent. Indian mobile phone companies added a record 10.2 million subscribers in March alone, taking the total to 261 million—almost the combined population of the UK, France, Germany and Italy.

India’s largest cellular company Bharti Airtel outperformed the others last quarter. It recorded the highest-ever net addition of wireless subscribers in a single quarter—6.9 million— taking its total base to 64 million, translating into a market share in this segment of 23.8 per cent. It consequently reported impressive results for the quarter. Net profit was up 39.28 per cent at Rs 1,792.3 crore, while revenues rose 44 per cent to Rs 7,819 crore.

Reliance Communications and Idea Cellular, too, beat expectations with their numbers (with over 45 per cent rise in net profit during the quarter), bolstered by increased average revenue per user and a swelling subscriber base. Says Harit Shah, Analyst, Angel Broking: “Things are looking good for telecom companies. There is a lot of headroom for growth as the telecom density in the country is still low.” But should the economy slow down some more, then even telecom companies may find it hard to keep up their breakneck pace of growth.

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