India Inc continues to struggle

Early bird second-quarter results are not cheering

Economy-watchers will not be enthused by the signs from the first set of second-quarter (Q2, Jul-Sep 2014) corporate results for the current financial year. These suggest that demand is weak and investment has not picked up. Revenue growth has been nominal and profit growth slow. The combined revenues of 190 companies that had declared results until Tuesday grew just 2.9 per cent year-on-year, the slowest pace in two years. Net profits grew at 16.7 per cent year-on-year, which is the slowest pace in five quarters. The results indicate a slump in domestic consumption, which was boosted in Q1, 2014-15, by election spending. Export growth also slowed. The positive effects of rupee depreciation in 2013 appear to have been exhausted. The rupee has been stable through 2014, affording less advantage to exporters and less protection to domestic players competing against imports.

What sustained profits were lower raw material costs, in line with reducing global commodity prices, and lower wholesale inflation trends. Net profits were also boosted by a spike in other income, which was up 46 per cent year-on-year. Operating margin was held at 29 per cent, up from 26 per cent in the corresponding quarter of last year. Most worryingly, results also indicate a slowdown in capital expenditure. Existing capacities are still underused. Depreciation allowance was down 0.7 per cent year-on-year for the entire sample. If information technology companies and refineries are excluded, the combined depreciation allowance contracts by a huge 11.4 per cent year-on-year for all other sectors.

Revenues are flat in rupee terms for a sample of 16 information technology companies that have declared results, though net profits are up 19 per cent year-on-year. Nevertheless, software contributed about a third of all net profits. Among other key export-oriented sectors, none of the pharma majors has yet declared results. But a sample of eight smaller pharma companies shows that net profits declined marginally in Q2. This may be an effect of wide-ranging domestic price controls, and of regulatory action in the US. In banking, the only public sector major to have declared results is Punjab National Bank, which disappointed due to higher provisioning for non-performing assets (NPAs). There are apprehensions that the NPAs of PSU banks could rise due to their exposure to coal block allocations now cancelled by the Supreme Court. Hence, the differential in private bank and PSU performances is likely to remain marked. Private sector banks have declared double-digit profit growth so far.

There is hope that things could improve. Many major players in industries such as steel, energy, cement, construction, mining, capital goods, fast-moving consumer goods, telecom and automobiles are yet to declare results. However, central excise collections fell in September while the Index of Industrial Production also showed lower growth and car sales dipped. These trends suggest that demand is still sluggish. Optimism centred around the new government has not yet translated into concrete results for India Inc.