India Inc Puts up a Stellar Q4 Show Despite Macro Woes

But rising rates, input costs may be a cause for worry, going forward
RAMKRISHNA KASHELKAR ET INTELLIGENCE GROUP
April 25 2011

Indian companies could defy high inflation and rising costs to turn in stellar results for the three
months ended March 31, if numbers from close to 100 companies are anything to go by. The first
97 firms to announce March quarter results — mostly from sectors such as IT, petroleum,
chemicals, auto ancillaries and finance — posted a 27.2% growth in sales and a 28% increase in
net profit. The year-on-year net profit growth at 28% is certainly healthy and in line with the trend
in the last few quarters. The net profit growing at a higher pace than topline is a trend visible
through all the four quarters of FY11, which has consistently improved the PAT margin to 12.4%
in the March ’11 quarter. A closer look at the early results, however, throws up some worrying
trends. Spiralling costs show that there are a couple of worrying trends — inflation and rising
interest costs. While the data of just 97 companies cannot be considered a representative
sample, investors need to be wary. India Inc, which successfully batted inflation till the December
2010 quarter, appears to be losing ground now. A spurt in input prices in the March quarter has
brought down the aggregate operating profit margin. Input costs as a proportion to net sales rose
to 52.9% — the highest in two years. Input prices rising faster than sales, point to the impact of
inflation on corporate margins. RBI resorting to rate hikes to battle inflation also seems to have
started hurting India Inc. The 34.4% year-on-year growth in aggregate interest costs during the
quarter was the highest in two years, a trend visible in the last six quarters. Around 8.5% of the
revenues were spent to service loans during the March ’11 quarter, compared with 8% in March
’10.
India Inc, however, maintained or improved its profit margins through better efficiencies and
controlling depreciation charges. The growth rate of the group’s other expenditure and staff costs
consistently remained below the sales growth. In other words, Indian firms are generating more
sales while keeping staff and other costs constant, which is an encouraging sign.
The depreciation charges for March quarter was slightly below the year-ago level, which was the
case in December ’10 quarter as well. While the stagnation in depreciation is good for the
companies’ bottomlines, it indicates a pause in corporate investments. This is another worrying
factor, since investments create assets and capacity within the economy. Several important
sectors such as power, pharma, metals, auto or real estate do not find much representation in the
first lot of 97 companies to announce their results. There is a possibility of a reversal in the trend
observed in early results.