Statsguru: 4 July 2011

Will corporate India be able to cope with rising interest rates and soaring raw material prices in the current financial year? Corporate results for 2010-11 suggest it can — but the big challenge lies in sustaining demand. Net sales for a sample of 596 companies for which unaudited results are available grew a steady 22 per cent (albeit on a low base in 2009-10). And though net profit growth cooled to 26 per cent from 36 per cent in 2009-10, it suggests an ability to pass on higher costs. Pared to 369 companies in the BSE 500 and NSE 500 indices, the profit growth is 28 per cent. Only the small and medium cap companies saw a meagre bottom line increase – 14 per cent – an indicator of their inability to cope with cost pressures.

Despite these hurdles, these companies continued to invest in expansion, with a healthy Rs 3 lakh crore addition to fixed assets. SMEs even increased their borrowing to fund growth plans. Cash flows through internal accruals were also healthy with the sample companies adding Rs 2.62 crore in capital formation through retained profit and public issues. Large-cap companies in the BSE and NSE indices had no problem servicing debt since interest cost to operating profit ratio at over 11 per cent provided a significant cushion. The SMEs are less robust in this respect.

So corporate balance sheets are strong but apart from this there is little reason to cheer. Evidence of the weakness in the investment cycle came from the first-quarter gross domestic product numbers, which showed that real gross capital formation was flat for the quarter ending March 2011 against an average growth of 11 per cent since June 2005. A slowdown in demand is already making itself felt in automobiles and FMCG. So 2011-12 could be a testing year for corporate India. (Click here for table & graph)