If the first set of corporate results for the September quarter doesnt quite reflect the slowdown in the economy,its because a weak rupee which lost some 10% has boosted revenues and operating profits.
While the aggregate numbers show a big uptick from previous quarters,a closer look reveals that India Inc isnt exactly in the pink of health. Companies are still struggling to sell domestic motorcycle sales volumes at Bajaj Auto were down 16% year-on-year during the quarter and the company lost some share in the executive segment with analysts suspecting customers have been downtrading. Some amount of downtrading has affected companies like Castrol,too,which has reported falling volumes in eight of the last 10 quarters,suggesting weakness across the automotive and non-automotive segments.
Indeed,core sectors of industry remain sluggish. Construction is clearly not doing well as seen from the sales of cement major UltraTech,which dipped 4.2% y-o-y while profit halved. And whereas order inflows at Larsen & Toubro were up 27% y-o-y in the second quarter overseas businesses have contributed as much as 43% of the intake. So while the company stayed with its revenue guidance of 15% and order guidance of 20% for the year,the accompanying commentary was cautious. Chief financial officer R Shankar Raman said the environment was yet to get better,pointing out that the private sector seemed to have taken a breather from investing.
If investments arent picking up,it would mean the economy hasn’t bottomed out just yet. The other piece of evidence suggesting companies arent ready to add capacity or grow their businesses in a hurry lies in the loan growth that some private sector banks have reported. Business is clearly dull loan growth at HDFC Bank was 16% y-o-y ,while corporate loans grew slower at 15% y-o-y. And Axis Bank has actually tempered its loan growth forecast for the year to just 15%,ostensibly because it doesnt see much opportunity to lend profitably.
So while for a clutch of 63 companies (excluding banks and financials) revenues are up 16.5% on an annual basis,way above that for the previous quarters,when it was in single digits,the data are skewed given the presence of Reliance Industries (RIL) and three large IT firms. Helped by a weak rupee,RIL reported a rise in revenues of 15% y-o-y with exports contributing 66% of sales.
However,companies evidently dont have too much pricing power. Despite the smart increase in sales,operating profit margins (OPM) for the 63 companies have stayed virtually flat since expenses have also gone up by 16.7% y-o-y. At L&T,for instance,adjusted OPMs were down 40 basis points y-o-y at 10.3%. At RIL the y-o-y increase in Ebitda or earnings before interest,tax,depreciation and amortisation was modest as it reported weaker gross refining margins and a smaller output of gas from its D6 block in the Krishna-Godavari Basin. The increase in net profits for the sample,up by 14.4% y-o-y,is partly due to a jump in other income.