Good times, great results

Corporate results for the first quarter of FY 2005 have been excellent, with most companies posting very high sales growth and an even greater increase in profits.

There are many reasons for the outstanding results, the most important ones being robust domestic as well as external demand. The effect of a good rabi harvest, coupled with last year's record kharif output, put money into the hands of rural consumers.

At the same time, export growth has been in the double digits. The upshot has been an expansion in volumes.

Even more significant is the fact that corporates are seeing the return of pricing power in many industries, metals and cement being obvious examples.

Even as demand has risen sharply, thanks to explosive growth in China, supply has been constrained, and the net effect has been a rise in prices.

This is especially true in raw materials, where obtaining new supplies is not easy""witness the huge rise in the price of iron ore and the supernormal profits earned by ore producers.

In other words, corporates in the metals, ore, petrochemicals and shipping industries are reaping the benefits of the turn in the global business cycle. The same effect can be observed in an industry enjoying natural protection such as cement, which is dependent on domestic conditions.

With most industries operating at or near peak capacity, pricing power has returned after a long gap. Among the other factors aiding topline growth have been the continuing increase in retail credit, which, together with the low interest rates, has proved to be a potent source of demand. The outsourcing story continues to gain strength in spite of all the adverse publicity, as borne out by the results of the software companies.

Will the good results continue? Much of the acceleration in India Inc's growth occurred in the second half of last year""this base effect could result in lower earnings growth in the second half of the current year. Significantly, analysts forecast lower earnings growth for FY 2005 than that notched up in the first quarter, implying that growth would slow down in the latter part of the year.

Apart from this base effect, however, there are several positive factors. The global economy and trade are expected to grow handsomely this year, so external demand should continue to be robust. All the big software companies have raised their guidance for the year.

Also, investment demand is expected to rise substantially, with most companies announcing expansion plans""capital goods manufacturers' order books are bursting at the seams.

Against these, the two main concerns for companies today are the poor progress of the monsoon so far, and the rise in fuel prices. The increase in coal and fuel prices announced recently, for instance, will hurt margins in the next quarter.

Added to that is the worry that interest rates are likely to rise, which could impact retail credit growth. In the circumstances, the government could help by offsetting, to the extent possible, the impact of a poor monsoon by measures such as revitalising the highway construction programme.