At a canter

The frequently forecast slowdown in the corporate sector doesn't seem to have arrived. The Business Standard Research Bureau's comparison of the December quarter results of 318 non-financial companies with their results for the September quarter shows that sales growth continues to be robust, at 26.1 per cent, compared to the growth of 25.9 per cent in the second quarter.

Moreover, net profit growth, at 45.9 per cent for the December quarter, has been far better than the growth of 36.7 per cent in the previous quarter.

This excellent performance has been aided by savings in interest cost""the interest paid by these 318 companies was much lower in the third quarter than in the second""and by higher "other income".

That doesn't mean, however, that profits were higher only because of these factors""at the operating level too, profits rose by 30 per cent in the third quarter, compared to 29 per cent in the second quarter.

Nevertheless, in spite of good growth in both top line and bottom line, profit margins have been hit. Although margins are higher on a year-on-year basis, they have been squeezed compared to the second quarter.

For instance, operating profit margins fell from 22.4 per cent in Q2 to 19 per cent in Q3, while net margins too declined by almost 100 basis points. The implication is that while higher costs have started impacting margins, rising revenues have been more than adequate to offset them.

Performance has been varied across industries. Some of the leading pharmaceutical companies have been badly hit, as the changes in the US generic market have taken their toll.

Two-wheeler companies have not met market expectations, and margins have been hit as raw material prices have escalated.

On the other hand, steel and aluminium companies have done well, thanks to buoyant prices. The cement industry has entered into a new phase, with supply and demand being much more closely aligned, and this has been reflected in the performance of cement companies.

In the information technology space, most of the large companies have done well, although rupee depreciation has affected the profits of some of them, and wage costs have risen. But the outlook for IT remains very positive.

Reliance Industries' results illustrate the health of the refining business, with record refining margins, and the indifferent performance of the petrochemicals business, because of rising naphtha prices.

The results from the banking sector show that banks have been able to grow their core lending business sufficiently to offset the lack of profits from the treasury side of the business.

Going forward, the main theme for corporate India is going to be capital expenditure, which is going to increase sales as well as profits.

It may take time for plants to come on stream, but since all capital expenditure is capitalised during the setting-up period, the costs don't affect the profit and loss account until the plants are commissioned.

And when the new capacities come on stream, the improvement in operational efficiencies in recent years will ensure that much of the benefits flow directly to the bottom line. In short, while cost pressures will continue, higher volumes will offset them.