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India Inc.: Other income to the rescue

The overall optimism was kept alive by India Inc. which reported another good quarter ended June 2007. At first glance, the performance seems fantastic.

By Mahesh Nayak | Print Edition: July 1, 2007

The overall optimism was kept alive by India Inc. which reported another good quarter ended June 2007. At first glance, the performance seems fantastic, with 2,308 companies registering a massive 39 per cent growth in net profit to Rs 59,273 crore, against Rs 42,586 crore in the previous corresponding period ended June 2006. Topline grew 19 per cent to Rs 5,33,784 crore (Rs 4,49,058 crore) during this period. Despite other income surging 73 per cent to Rs 23,578 crore (Rs 13,619 crore), the performance by India Inc., at the operating income level, too, was quite impressive. It recorded margins of 38 per cent, compared to 28 per cent in the earlier quarter.

Says Amitabh Chakraborty, President (Equities), Religare Securities: "The overall first quarter result was in line with expectations. The rising rupee helped bring down the cost of raw materials. However, rising interest and salary costs somewhat offset this advantage." Expenditure rose 14 per cent to Rs 4,10,240 crore (Rs 3,59,386 crore), which was due to the 22 per cent rise in salaries to Rs 36,964 crore (Rs 30,310 crore) and raw material costs that increased by 12 per cent to Rs 2,85,169 crore (Rs 2,53,830 crore).

However, a closer scrutiny of the fine print reveals that this stellar performance is driven mainly by second-rung companies. For the 30 Sensex companies, profits rose 24 per cent to Rs 24,668 crore (Rs 19,900 crore) on a 16 per cent rise in revenues to Rs 1,33,042 crore (Rs 1,14,860 crore). However, the operating incomes of the Sensex companies grew only 17.7 per cent, thus, indicating that the growth came mainly from higher other income. These companies reported a PBDIT growth of 18 per cent to Rs 38,238 crore (Rs 32,474 crore).

Says Rajesh Jain, CEO, Pranav Securities: "There were no major disappointments in future guidance. That is why the markets have rewarded investors." Despite the crash on July 27, 2007-the Sensex tanked 542 points (3.4 per cent) following concern over global weaknesses-between June and July 2007, it gained 6 per cent.

Among the Sensex stocks, the best performers were Maruti Udyog (profits up 35.2 per cent), Grasim Industries (up 64 per cent), SBI (up 78.5 per cent), ITC (up 20 per cent) and Dr Reddy's Laboratories (up 35 per cent). The disappointments came from Bajaj Auto (down 18.1 per cent), Reliance Energy (down 18.5 per cent), Cipla (down 30 per cent) and NTPC (down 23 per cent). Meanwhile, overall, among sectors, banking disappointed; almost every bank, with the exception of SBI, reported lower net interest income than market estimates.

Engineering and automobile and auto components companies also disappointed the Street; companies like Suzlon, BHEL and Siemens posted lower margins in the engineering space and auto companies like M&M, Punjab Tractors, Bharat Forge, Ashok Leyland Amtek Auto and TVS Motor recorded lower than expected profits. The cement sector, led by Grasim Industries, and companies in the infrastructure and FMCG sectors impressed the market with their higher margins. Says R. Sreesankar, Head (Research), IL&FS Investsmart: "Going forward, the road is tough for India Inc."

For now, despite the minor glitches in the fine print, Indian companies can look back at the first quarter with some satisfaction. However, if margins that are under pressure don't improve-given the backdrop of high oil prices and concerns over global slowdown-it will be tough for the market to sustain at these levels.

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