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Can you see the light?

Corporate results prove growth is back, although margins are under pressure and likely to stay that way.

Rajiv Bhuva | Print Edition: May 30, 2010

India Inc. is back. If the burgeoning Index of Industrial Production (IIP) numbers—a record 17.6 per cent year-onyear growth in December, 16.7 per cent in January, and 15.1 per cent in February—weren't enough to convince diehard naysayers, the corporate results for the fourth quarter of the year to March 31, 2010, should. An analysis of results announced by over 800 listed companies at the time of writing reveals robust double-digit growth over the previous year's corresponding quarter across key parameters.

With a 30 per cent growth in revenue, 11 per cent in operating profit and 28 per cent in net profit, it would be fair to believe that the worst is behind India Inc. (for the entire fiscal, the top line is up 13 per cent, operating profit 14 per cent and net profit 27 per cent over a year ago). What's more, once results of all the mainline companies are in, the picture could look even brighter—of the companies that make up the BSE 500 Index, only 200 had declared results.

Perhaps the first hints of a turnaround were visible in the report cards for the third quarter ended December 2009. According to the Reserve Bank of India's Macroeconomic and Monetary Developments report, published on the eve of the annual monetary policy in mid-April, year-on-year sales growth of select non-financial, nongovernment, listed companies, was the highest in the last five quarters.

"The rebound in sales growth points to improving private demand," the document says. For India Inc., the transition is from meagre to robust growth. "The top-line performance did not slip into negative territory (in the past six quarters)," says Jagannadham Thunuguntla, Head of Equities, SMC Capital.

What aided India Inc.'s cause was a significant decline in interest expenses in the fourth quarter—down by a little over seven per cent. This is clearly a reflection of a lower interest rate regime—rates fell by over 400 basis points since October 2008. The flip side, however, is rising commodity prices and bloating wage bills, which have put margins under pressure.

From 35 per cent in March 2009, operating profit margins have fallen to 30 per cent in March 2010 for these 800 companies. Raw material and other input costs were up by 55 per cent over the previous year's fourth quarter and salaries and wages grew by 13 per cent. "Margins need to be looked at very carefully from here," says Vaibhav Sanghavi, Director (Equities), Ambit Capital.

At the bottom-line level, though, the comeback is well on its way. In the third quarter, gross and net profits rose by 60 per cent and 100 per cent, respectively, aided largely by a low-base effect and costreduction measures. The corresponding figures for the fourth quarter are 11 per cent and 28 per cent.

Sector-wise, information technology (IT), automobiles and banks have shown a strong comeback. For IT companies, the strong business momentum is evident from the revenue buoyancy. Revenues grew six per cent over the third quarter of 2009-10 and 12 per cent over the fourth quarter of the previous year . But a strengthening rupee and increasing wages would put their margins under pressure.

"This is likely to continue for the coming few quarters," warns Sanghavi. Even attrition is on the rise for the IT companies. In the big league, Wipro is reported to have witnessed a whopping 17.1 per cent attrition between January and March 2010, compared to 8.4 per cent in the quarter ended December 2009.

Top-line growth of 17 per cent over the previous quarter and 41 per cent over the last year show that strong domestic consumption has helped the automobile sector post better than expected results. But here again wages and higher commodity prices have eaten into margins.

In the financial space, despite the fact that credit offtake fell, banks have so far posted better results. The four per cent growth in income over the previous quarter is mainly due to re-pricing of deposits and improvement in credit quality. And that credit uptake is expected to go up is another positive for the sector.

The sentiment on Dalal Street is upbeat. "The next two fiscals will have significant earnings growth," says Anup Maheshwari, Head of Equities & Corporate Strategy, DSP BlackRock Investment Managers. He expects 20-25 per cent and 20 per cent earnings growth in the years ending March 2011 and 2012, respectively.

But don't expect a short-term bounceback. Reason: "The betterthan-expected corporate results had been factored in by the markets long before," says SMC's Thunuguntla. For now, it's the global macro situation—stemming from the euro crisis triggered by Greece's woes—that will determine which way markets move.

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