Further acceleration!

Anyone who thought that the Indian corporate sector would not be able to maintain the momentum of the last couple of years into the first quarter of a new year, had better think again. The quarterly financial results of 575 companies (excluding banks and refineries) that have been announced so far paint a picture of a strong and resilient India Inc. Net sales have increased by 28.64 per cent over the April-June 2005 quarter. In the preceding four quarters, net sales growth for these 575 companies had varied within a fairly narrow band, between 16 per cent and 18.3 per cent. The new momentum to the top line of companies is therefore a healthy break-out. It is of course true that in some industries sales have increased largely because of price increases, but most of the growth has come from an increase in volumes.

If the top line growth has exceeded expectations, the improvement achieved in profits too has been very impressive. Notwithstanding the pressures that flow from the higher cost of capital and several sector-specific issues, the 34.04 per cent growth in operating profits has been much better than the 18-29 per cent that investors have seen in the previous four quarters. The improvement in operating profits has come about through tight control on expenses, which rose at a lower rate of 26.4 per cent. In the June 2005 quarter, these 575 companies had posted net profit growth of almost 50 per cent, but in the next three quarters this declined to the 18-26 per cent range. Against that backdrop, the 39 per cent profit growth reported for the June 2006 quarter has stunned analysts. The 25.95 per cent rise in interest cost was lower than the growth in operating profits, which helped the improvement in net profit. If non-banking finance companies (NBFCs) are removed from the list, the increase in interest costs is even lower at 18.51 per cent.

As always, some sectors stand out from the others. No one will be surprised that cement has had a bumper quarter with a near 40 per cent y-o-y top line growth, most of it coming from better prices, which has led to a juicy 189 per cent increase in net profit. Engineering companies too have reported net profit growth of 51 per cent on sales growth of 27.2 per cent. Software companies have also done very well, posting 41.45 per cent revenue growth, 50.76 per cent growth in operating profits and a 57.5 per cent increase in net profit.

Early bird numbers have an upward bias as sectors like software announce their results before other sectors, and the better results tend to get announced sooner. Nevertheless, the current sample is large enough to be able to assert that there are no signs of a slowdown in Corporate India; in fact, many companies are even now gathering momentum""as the credit growth figures underline. Volume growth is robust, raw material costs are under control and interest rate hikes have not yet dented the bottom line. So, if consumption continues as it did in the June quarter and interest rates stay within a reasonable range, Indian companies are likely to continue doing well in the foreseeable future.