Getting better

Corporate results for the third quarter of FY 2004 show that India Inc continues to improve its performance. A Business Standard Research Bureau study of 950 non-banking companies shows that year-on-year sales growth during the quarter was 18.4 per cent, well above the y-o-y growth rate of 15.1 per cent in Q2 and the 11.8 per cent rise in Q1.

Net profit growth in the third quarter was a huge 55.6 per cent, compared to 50.1 per cent in Q2 and 42.5 per cent in Q1. Nor was this improvement solely the result of lower interest costs "" the fall in these costs was more in the second quarter than in Q3.

That conclusion is also borne out by the growth in operating profits, which improved to 22.5 per cent from 18.6 per cent in Q2 and 15.3 per cent in Q1.

Also improving is the quality of earnings. Other income growth during the third quarter, at 20.3 per cent, was much lower than the 52.2 per cent rise in Q2 and the 44.6 per cent growth in Q1.

While these figures may change once all the results are in, most of India Inc has reason to feel good.

The reasons for the excellent performance are not hard to find. Commodity prices have continued to be firm "" all the steel companies, ranging from Tata Steel to SAIL to Ispat, have posted hefty profits compared to losses in the corresponding period of FY 2003.

The upturn in the petrochemical cycle continues, which has helped Reliance Industries show very good results. The China effect and an improving world economy have buoyed the shipping industry, reflected in the results of all the shipping companies.

The auto sector continues to be on a roll, with companies like Maruti, Tata Motors and Ashok Leyland doing very well. Both the results as well as the guidance from the tech sector have been very positive.

Even engineering companies have done well "" ABB being an example. At the same time, certain sectors haven't performed quite so well "" examples include the pharma industry, where Dr Reddy's Laboratories and Ranbaxy have seen declining profits; the FMCG sector, where Britannia's performance has been tepid at best; textiles, with high cotton prices impacting Arvind Mills; and cement companies, continue to disappoint.

Also, much of the rise in profits for HPCL and BPCL has been due to a write-back of subsidy. Many banks have been hit hard by the bottoming out of interest rates, as windfall profits on sale of investments have disappeared.

Will the positive trends continue? The recent relaxation in external borrowing norms could see a further decline in finance costs.

The improvement in the world economy has already been reflected in the December export figures. A good rabi crop should see a further pick-up in rural demand.

On the other hand, the continuing rise in raw material prices could impact the bottom lines of finished goods producers. The crucial factor, however, and one that will determine whether corporate growth will continue beyond a good monsoon, is investment demand.

Companies across the board have already announced their expansion plans "" once they start getting implemented, it will provide a new source of growth for corporate India.