Signs of hope

Early bird results suggest business cycle may be turning up

The business cycle may have turned up - at least, going by the fourth-quarter results from a small sample of 190 listed companies. These "early birds" include many market leaders, including 15 of the Nifty-50. They have shown good revenue growth and a jump in net profits. Net sales are up 5.1 per cent year-on-year for this sample, which is drawn from across 48 sectors. Net profits are up 9.2 per cent year-on-year. As always, adjustments are necessary. The 10 banks and 26 non-banking finance companies in the sample have lower profits (down 16.9 per cent for banks, down 8.5 per cent for NBFCs and down 15 per cent for all financials). This is due to the insistence of the Reserve Bank of India on more stringent provisioning. If the financial companies are removed from the sample, net profits spike by a healthy 45.8 per cent while revenues are up 4.7 per cent. Within the sample, however, Cairn India and its parent Vedanta logged huge non-cash impairments of goodwill. Impairments totalled Rs 22,128 crore in Q4, 2015-16, versus Rs 19,475 crore in the same quarter of 2014-15. But even after excluding Cairn and Vedanta, sales revenue (ex-financials) for 152 companies grew by 6.4 per cent and net profits rose by an excellent 23.04 per cent. There has also been credit expansion, with bank lending up 12.9 per cent.

The net margin (net profits as a percentage of sales) was up by over 200 basis points at 14.13 per cent versus 12.03 per cent in Q4, 2014-15. Data on depreciation and amortisation as well as on tax incidence, on a larger sample, would reveal what has happened to operating margins and cash profits. Employee costs are up by an unusually high 44 per cent for the entire sample, and up by 50 per cent for the sample ex-financials. Interest costs are up 14.9 per cent (interest costs are up 10.3 per cent for financials). But raw material costs are down by 12 per cent; cost of finished goods is down by 9.4 per cent and power and other energy costs are down two per cent. In sectors such as engineering, infrastructure developers, gems and jewellery, pharmaceuticals and hospitality, many large companies have not declared results yet. In addition, most public sector companies have not declared their results. So trends are also not clear in sectors with a significant public sector presence like power generation, oil, gas and banking.

Despite such caveats, the recovery seems broad-based, with double-digit (or better) gains in net profitability for 22 sectors against double-digit dips in net profits for 10 sectors. Gains have been especially noteworthy in the information technology (IT) sector where many majors have already declared results. Overall IT revenues have expanded 16.95 per cent while net profits are up 32.8 per cent. Given the persistence of low energy prices, Reliance Industries has registered strong gains with a 17 per cent rise in net profits while the fertiliser industry is seeing a turnaround. Steel may be seeing a recovery and paper also seems to be entering an up-cycle. There has been some volume expansion and growth in profits for cement companies. Sadly, real estate and non-electrical capital goods are still in the doldrums with lower sales and lower profits.

Assuming that these trends hold up across larger samples, India Inc should be happy. After two years and more of stagnation, there is finally some visibility of the so-called green shoots of recovery. If the monsoon conforms to predictions that it will be "super-normal" and well-distributed, the ensuing boost to consumption will contribute to growth acceleration and help broaden the cyclical expansion.