Change of mood

Disappointing corporate results point to the new reality

Corporate results for the January-March quarter have been a disappointment, but there may be worse in store. For the 2,526 companies that have declared their results, quarterly sales were up a healthy 23 per cent, but net profits were up only 14.6 per cent, year-on-year. At a time of rising input costs, companies have either not been able to pass on the higher costs, or chosen not to do so in the interests of growing sales volume. The drop in profit growth is striking, when compared to the October-December quarter which saw profit growth of 24 per cent, and the quarter before that with 39 per cent. The squeeze on margins is evident, with operating profit margins and net profit margins shrinking by 44 basis points each, year-on-year. Indeed, the latest results have been made respectable by just five high-performance cases — Tata Steel, Sterlite Industries, Bajaj Auto, Bharat Heavy Electricals and NMDC. Without them, profit growth was just 9 per cent, or about the same level as inflation.

A Crisil Research report asks readers to expect more margin squeezes in the new financial year. The average Ebitda (earnings before interest, tax, depreciation and amortisation) margin for 17 sectors (excluding oil & gas and banking) is expected to fall by around a percentage point, to 19 per cent. Sectors such as cement, real estate, textiles and shipping are forecast to see a sharper drop in profitability. A more optimistic outlook is held out for upstream oil companies and integrated metals players with captive natural resources.

The sobering outlook finds reflection in the benchmark stock market indices. The Sensex and the Nifty have been among the worst performers among their Asian peers since the beginning of this financial year, slipping 4.84 and 4.69 per cent, respectively, by the end of May. Many brokerage houses have begun talking a bearish language. Motilal Oswal, for one, has downgraded the earning per share for the 30 Sensex stocks by 4 per cent in FY12. Only one Sensex stock, Hindustan Unilever, has received an upgrade while eight stocks have witnessed a downgrade.

It might be argued that the leading scrips, having dropped to an average price-earnings multiple of 17, are in fact more attractive now than at any other stage in the last year and more. But the accident-prone nature of the system (corruption charges, multiple arrests, an ineffective government and the prospect of a period of political instability) has raised risk perceptions and resulted in both foreign and domestic investors sitting on the sidelines and watching developments while they deploy their money elsewhere. Some have put their money in bullion or real estate; others have opted for fixed deposits which now offer somewhat better rates of interest. In other words, investors are using their wallets to pass on a message to company managements.