Auto Sector Growth May Soften Profits Fall

Net sales growth was pegged at a modest 16.5 per cent. "There's a definite slowdown in growth, mainly because the cost of borrowing has gone up and most companies are depositing this money into long-term assets," said Sanjay D'Souza, head of research at Nucleus Securities.

Prime lending rates jumped to 16.5 per cent in mid-1996 from 15 per cent a year ago, with many companies borrowing at up to 20 per cent.

Bank lending rates are currently at 15.5 per cent.

"Interest rates were quite high, and those companies that didn't have extra money from issuing overseas equity have been hit," said Devesh Kumar, strategist at W I Carr.

Analysts said declining global prices of commodities like petrochemicals, aluminium and steel coupled with cuts in import duties of these products would hit several index firms.

"Many index heavyweights are in the commodity business, where enough capacity has already come up and they are not even able to increase prices," Kumar said. Analysts said a new 12.9 per cent minimum alternate tax (MAT) on book profits of companies that previously did not pay taxes was also responsible for the slowdown in profit growth.

"MAT is one major factor contributing to the slowdown," said Sanjeev Mohta, head of research at broking firm James Capel B&K. Analysts slashed their earnings forecasts for several index heavyweights including the top two private firms, Reliance Industries and Tisco, after India introduced the minimum alternate tax.

"Falling commodity prices and a cut in import duties have also hit profits," Mohta said.

The poll forecast a 25.8 per cent drop in the first-half net profit for Reliance, due chiefly to a provision for MAT and a sharp decline in polyester prices.

The net profit of steel-maker TISCO was projected to rise by 12 per cent against a whopping 132 per cent a year ago. Steel firms Tisco and SAIL have been hit by falling prices and MAT.

SBI emerged the star performer in the Reuters poll.

Analysts said reduced provisions would provide a major boost to State Bank of India