Waiting for recovery

Early corporate results suggest demand is still weak

The early-bird results for the first quarter of the financial year suggest the wait for "better days" could be long. Profit and revenue have both shown tepid growth; companies continue to face the same headwinds as in the years during the latter half of the last government. The demand environment remains challenging, and incremental revenues are falling short of costs - both operational, as well as financial. Five years of near double-digit consumer inflation has made costs, especially salary and wages, sticky, translating into a decline in output per worker or labour productivity. Asset utilisation in a majority of the manufacturing and infrastructure industries is at the lowest in a decade, thanks to a combination of rapid capacity expansion between 2005 and 2011, and a subsequent demand slowdown. Both constraints feed into each other. Lower inflation could help companies put a lid on wage growth, and improve their cost competitiveness. Conversely, any halt to further capacity expansion would lead to a gradual improvement in capacity utilisation, leading to an improvement in corporate finances over a period of time. The results so far suggest that this is not happening on any meaningful scale as yet. Salary bills continued to grow faster than revenues, and volume and interest cost once again rose faster than operating profit. The result was a further deterioration in the interest-coverage ratio for companies.

Some sectors, however, show promise. Idea Cellular, the country's third-largest mobile telecom service operator, reported its best ever numbers in many quarters, raising hopes for a turnaround in the beleaguered sector. Top firms in the automotive, agro-chemical and consumer goods sectors also reported better-than-expected revenue and profit growth. But the worry is that most of the growth for quite a few firms is due to a spike in pre-election government spending, rather than the result of sustained demand recovery in the economy. Also, the rupee depreciation's positive effects are visible in the numbers for information technology or IT, pharmaceutical, automotive, auto-ancillary and textile companies. A gush of foreign capital inflows in the last nine months and the consequent reversal of the rupee's movement have shown up such growth as unsustainable.

Contrary to popular perception, profitability might be the least of India Inc's concerns at the moment. Core operating profit at 17.4 per cent (excluding other income) is at a 12-quarter high for the core manufacturing and services sector excluding IT, financials, and oil and gas. This could either be due to still-strong demand in certain pockets of the economy, such as rural areas, or the companies' ability to charge higher prices on the back of inflationary expectations among consumers. Either way, companies might want to consider sacrificing some of their margins and letting consumer demand recover. That might kick-start sustainable growth.