No real recovery

The growth in corporate India's profits is not broad-based

After several tumultuous quarters, corporate India’s earnings are turning positive. The ongoing earnings season has started rather well, with even laggards beating most estimates. The 170 companies that have reported their third-quarter numbers for 2012-13 so far have seen revenues grow by 18.5 per cent and profit after tax jump by 42 per cent compared with what they recorded in the same period last year. These companies account for 25 per cent of the total market capitalisation and 80 per cent of them have reported growth in profits and six companies have turned around. Some of the big turnarounds have also skewed the headline sales and profit figures. For instance, Essar Oil has reported a net profit of Rs 32 crore in the third quarter, compared to a loss of Rs 3,986 crore it reported in the corresponding quarter last year. So if one excludes Essar Oil from the list, the average revenue growth in the quarter drops to 14 per cent and net profit growth falls to 16.6 per cent.

Dig deeper, and it also becomes apparent that the “positive earnings” story is not very broad-based, driven largely by technology, banking and consumer sectors. While some sectors are seeing a genuine revival in demand, profit growth has also been influenced by a positive currency movement and lower raw material costs. Also, with global growth slowing, prices of most commodities have cooled, which has helped improve margins. Raw material costs are two percentage points lower as a proportion of sales in Q3 (excluding banking/finance and Essar Oil). From rubber to palm oil, raw material costs are down across the board for most consumer companies.

Though the earnings season has been good for IT, banking and consumer sectors, it continues to be challenging for construction, real estate, capital goods and infrastructure companies. While total income and profits have risen in technology and banking sectors, construction and infrastructure companies have seen a 60 per cent dip in revenues and profits. The auto sector too has put up poor numbers. While revenues of auto companies have grown four per cent, the sector's net profit has declined by five per cent. The story is not expected to be any different for sectors like power, infrastructure or capital goods.

Clearly, this is not a sustainable recovery. Consumption is propping up the economy’s currently low growth levels, and cannot do so forever. Investments have to pick up. Interest costs for Nifty 50 companies have risen by 5.5 per cent sequentially and 10.13 per cent year-on-year. Though interest costs are a crucial factor for any kind of a revival in investment, it may not be sufficient to convince the private sector to commit their resources to new projects. If investments have to pick up on a sustainable basis, the government has to move aggressively on policy changes to facilitate speedier land acquisitions and environmental clearances. Otherwise, no genuine recovery is possible.