Profit permutations

As the earnings season unfolds, it is clear that the overall performance of the corporate sector during the fourth quarter as well as during the full year 2008-09 has been way below its highs of the preceding years. This was only to be expected, given the general business climate, both global and domestic. What is both interesting and important, however, is the complex ways in which the macro-economic environment has been impacting corporate earnings across the different sectors. It would be tempting to attribute a broad-based slowdown in revenues and profits to the slump in demand. And this is certainly the case in many, perhaps most, sectors. But, in reality, the past several months have seen an enormous amount of turbulence in many variables that have a direct impact on both sales and profits. Across a variety of sectors, some of these variables have moved in directions that have actually helped to offset some of the effects of the demand slowdown.

The most striking example of this is the oil marketing companies which, after being under enormous financial pressure for the first half of the year as crude oil prices reached record highs, are now sitting pretty. Oil prices have dropped precipitously, while the retail prices of refined products have been brought down only marginally. Realisations have turned from being hugely negative to hugely positive, as a result. While the sector is collectively expected to see a drop in revenues in the fourth quarter, by over 17 per cent compared to the previous year, profits are expected to rise by a humongous 455 per cent. Similarly, the IT sector, as reflected in Infosys’ results, has benefited significantly from the sharp drop in the rupee during the past few months. A decline in dollar revenues has been offset by a weaker rupee to provide an estimated 20 per cent growth in revenues during the quarter for the sector as a whole. Profits are expected to increase by a more modest 11 per cent, but even this is an achievement in the current circumstances. Yet other sectors are likely to see their profitability shored up by a sharp drop in input prices, which more than offset the decline in demand. Two-wheelers, for example, are likely to reap dividends from the decline in the prices of various metals. A sector that is living up to its classification as “defensive” i.e. insulated from the slowdown, is Fast Moving Consumer Goods (FMCG), which is expected to see its fourth-quarter profits increase by 11 per cent over the previous year. Of course, there are several sectors in which macro-economic forces have reinforced the slowdown in demand, to cause substantial declines in both sales and profits. Realty, for example, in which listing is a relatively recent phenomenon, has swung very quickly from crest to trough. The sector is expected to see a 60 per cent decline in sales and an even harsher 80 per cent decline in profits.

Similarly steel and other metal producers have been reeling under the double whammy of slowing demand and falling prices.

Overall, the results will not do very much to challenge the generally cautious mood of the moment. But they do highlight the fact that the environment is extremely complex, with multiple forces acting on companies in different ways. The corporate sector is demonstrating the validity of the adage that there are opportunities even in crisis.