Not quite a bull run

Q3 results look better because of RIL's Jamnagar unit

The results season is upon us and the analysis of the results of an early crop of 665 companies is cause for optimism. These companies, it is true, represent only one-fifth of the universe of all those companies that report their quarterly results on a regular basis. The initial numbers also tend to get skewed by an occasional outlier. But the analysis of this early sample by this paper’s research bureau is showing some distinct and heartening trends. The good news is that we are seeing improved profitability across sectors like automobiles, auto ancillaries, IT, cement and steel. On average, the operating margins are up from 10.1 per cent a year ago to 14.7 per cent. Of course, Q3 and Q4 last year were terrible, having borne the full fury of the credit crunch. Twelve months ago, it wasn’t really demand destruction, but sudden freezing of working capital and postponement of orders that was the problem. So, to avoid the illusion caused by a low base effect, it is better to compare the latest set of data with those in the December 2007 quarter. Compared to the picture two years ago, operating margins are down by 2 percentage points. This provides some justification to why the finance minister should avoid an abrupt exit from the fiscal stimulus. It is, however, heartening to note that the December quarter margins are only slightly lower than those in the previous quarter, even though input costs have risen substantially. This means that profits have been sustained by significant expansion in revenues and prices. Higher pricing power for the producer also indirectly reflects increase in demand. In other words, the quarterly corporate numbers clearly reflect the changed growth trajectory in the economy.

The overall increase in top line by 22 per cent, however, is skewed by one large company — Reliance Industries Limited — whose revenues are up by a whopping 93 percent, thanks to the increase in production of its Jamnagar unit. If that is removed from the sample, the top lines have grown modestly at around 13 per cent, with some biggies growing only by single digits. Similarly, sugar companies as a group also have skewed the average somewhat, since sugar prices shot up by 82 per cent, causing margins to go up steeply. But the broad picture is that margins are improving, and this result is unchanged even if we remove banking and finance companies from the sample. Profitability is rising, but is still considerably lower than peaks attained in 2007. Going ahead, there is greater uncertainty about input costs (including interest costs) and sustainability of pricing power. Hence further sequential improvement in the next quarter is doubtful. The stock market is already getting jittery anticipating excise duty hikes in the Budget, but hopefully, sentiment will revive in time for the pipeline of PSU divestment.