We have seen India Inc. swimming against the tide quarter after quarter and emerging victorious by posting a good set of numbers on many an occasion. But sometimes, the tides get just too rough to handle and every attempt at swimming against them only tires you out without much success. The results for the September 2011 quarter seem to be echoing a similar story for India Inc. While rampant inflation, rising interest costs and weakening IIP numbers have already been playing spoilsport for quite a few quarters now, the situation has only been aggravated further with a new irritant entering the scene – mounting forex losses posted by the companies. These have only made matters worse for India Inc., whose bottomline seems to be weakening at its knees.
The September results season has almost ended, with the results of 2667 companies with us so far. With a consolidated topline growth of over 23%, India Inc. continued to show strong resilience in this quarter too. This is quite a relieving picture really, in an overall scenario like the one we are in presently. However, the excitement over a decent topline growth suddenly turns glum when you
look at the bottomline. The net profits have declined sharply by about 36% over the corresponding period! Can this really happen? There seems to be some kind of a disconnect here.
A deeper scrutiny of the data reveals that during September 2010 the net profits were skewed due to the onetime gain of Rs 16209.90 cr that Piramal Healthcare saw from the sale of its business to Abbott, while on the other hand, profits for the quarter ended September 2011 look stunted due to the highest-ever loss posted by Indian Oil Corporation during the quarter.
Thus, to get a clearer picture, we adjusted these aberrations and removed the numbers of PSU oil refinery companies, extraordinary items and the numbers of Piramal Healthcare. This brought in some rationality, with the topline growing at an even stronger rate of 23%, while the bottomline actually grew by close to four%.
Though this looks much better than the gross numbers, the adjusted numbers aren’t something to get hugely excited about. They are a clear reflection of the state in which the Indian economy currently is, in the light of unbridled inflation and rising interest costs. With inflation averaging at 9.6% on a fiscal-to-date basis, the five rate hikes since May 2011, the IIP falling consistently over the last quarter to a mere 1.81% as on September 2011 and the economy growing at 7.7% (the weakest in the last six quarters, not to forget the forex losses), it is indeed wishful thinking to expect India Inc. to perform well amongst these adversities.
While steep inflation has pushed the input costs up by a huge 31%, we would also like to bring to your notice the sharp rise in the interest cost. Even after adjusting the interest cost of banks and financial institutions, the interest cost for the September 2011 quarter has shot up by a massive 49% or Rs6797 cr. Now, this is quite huge for India Inc., as the rate hikes effected in quick succession have increased the interest burden on the existing debt.
A deeper look into the numbers suggests that the situation has only worsened. Out of the total of 2667 companies, the net profits of 1194 companies increased, those of 1329 companies declined while those of 144 companies remained stagnant on a YoY basis. In fact, the number of lossmaking companies increased by 26% to 695 companies in Q2 FY12. This is higher than the increase by 636 companies seen in Q1 FY12 and 538 companies seen during Q2 FY11. The only saving grace here is the sales figures, where out of the total of 2667 companies, the sales of 1648 companies increased, those of 774 companies declined and those of 245 companies remained stagnant.
In fact, if you go a little further and look at the numbers from the manufacturing and services point of view, it can be seen that while the adjusted topline growth for the manufacturing sector remains strong at 21%, the bottomline has managed to grow by five%. This is commendable, and shows the resilience of these companies despite the fact that manufacturing has been the worst affected by inflation and interest costs. What is even more shocking is that the adjusted bottomline for companies in the services sector increased by a mere 1.80%, though the topline increased by a strong 27%. Similarly, a comparative analysis between the PSUs and the private sector shows that while the PSUs (excluding oil marketing companies) managed to post almost a 20% bottomline growth, the private sector has let us down, with profits declining by almost 53%.
All in all, it is not a pretty picture to look at, and this may only deteriorate in the coming quarters. Rising inflation (already on a high base) and the lag effect of rate hikes will only increase the uneasiness for India Inc. going forward. The concerns have been only on the bottomline front till now, but going forward, these may creep up on the topline front too, as we expect the demand to weaken in the wake of the factors mentioned above. Already, with the demand taking a beating, interest rate-sensitive sectors are feeling the heat. This could only spiral downwards in the coming quarters, as customers are expected to postpone their purchases.
Besides, with the cost of funds going up sharply, India Inc. is not only going slow on investments, but may also stall projects altogether. Thus, with capacity additions expected to take their own sweet time, darkness looms over the future growth prospects of India Inc. Moreover, what will also act as a dampener in the next two quarters is the high base effect of the December 2010 and March 2011 quarter numbers. In these two quarters, the topline grew by 19% and 22%, while the bottomline growth grew by a strong 17% and 18% respectively. Thus, with such a high base effect and concerns looming large, it is highly unlikely for India Inc. to be able to sustain growth.
One also has to understand that while the September 2010 profit growth was in single digits too, its tax outgo was still higher, thus indicating better quarters ahead. In contrast, the tax outgo in September 2011 has declined by 10%, thus indicating a weaker quarter ahead. If these numbers are not expected to sustain then the Sensex at the 16700 levels and a trailing PE of 18x looks more expensive at the current levels. Hence, with the earnings expected to weaken in the coming quarters, the probability of the Sensex slipping even further cannot be ruled out. Read on to view our sectoral analysis.
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