Quarterly results belie paucity of private investment

In the general mood of positivity following the emergence of a government with an absolute majority in the Lok Sabha and an apparent emphasis on reforms, attention is focused on the steady rise in the stock market and the relative stability of the rupee. However, both these favourable tendencies rest ultimately on fundamentals. The current financial year's first-quarter corporate-result season has just ended and the performance of different groups of companies allows an assessment of whether the fundamentals are strong enough to justify the buoyancy in the market. At the aggregate level, the net profit of over 1,700 companies (excluding companies in the financial, and oil and gas sectors) analysed by the Business Standard Research Bureau grew by over 35 per cent year-on-year. This is significantly faster than the 27 per cent achieved by the same companies in the previous quarter. What is striking, though, is how much faster profits have grown relative to sales. In the April-June quarter, the revenues of these companies grew by a modest 12 per cent, virtually the same rate as they achieved in the January-March quarter. Growing the bottom line without the top line basically comes from improvements in cost efficiency. The numbers, then, reflect well on managements' efforts to contain costs through productivity increases. But there is a limit to growing profits this way; sustained earnings growth can only come from a steady increase in revenues.

While the overall profitability trend is positive, the quarterly results reveal wide variation across sectors. Four that have performed well are information technology, pharmaceuticals, some consumer goods and automobiles. The first two sectors reflect the consolidating recovery in export markets and the stability of the rupee. Pharma, though, has also benefitted from improved domestic sales. The acceleration in consumer goods and automobiles suggests a revival in consumer confidence about prospects of higher incomes. This is all to the good. However, signs of a broad-based recovery in the capital goods and other investment-related sectors, which many observers were expecting to see in the wake of heightened policy reform expectations, are not yet visible. Of course, it may be too early to see signs of the investment boom that was supposed to materialise after a favourable electoral outcome, but the fact is that a growth acceleration from the current levels will not take place without investment activity picking up significantly.

Both the government and investors can draw messages from these patterns. For the former, the intent to get investment going again has been articulated and rightly so; but the emphasis must be on action. A revival in private investment depends heavily on an increase in infrastructure capacity. Getting stalled projects moving as fast as possible is imperative; more so, confidence needs to be instilled about the sustainability of the process. Also, there has to be some realism about how long the recovery will take, and expectations have to be managed accordingly. As regards investors, these results are an indication that the current market momentum cannot sustain itself unless the economy fires on all cylinders. As the United States Federal Reserve steadily rolls back on liquidity, capital inflows will also moderate. In short, it's time for government aggression and investor caution.