Difficult year ahead: Signs of weakness, growth will now soften, says India Inc

Although results for the full year ended March 2008 are expected to be good since a major part of the year until December was favourable, the last quarter is expected to have ominous signs, they said.

“By and large, corporates will report over 15 per cent growth in earnings in the last quarter of FY08. Full year earnings will see a growth of 20-21 per cent,” said Sudip Bandyopadhyay, director and CEO, Reliance Money. This is in sharp contrast to the profit growth of around 38 per cent in the June quarter of 2007-08, 25 per cent in the September quarter and 23.7 per cent in the December quarter.

High inflation and interest rates had hit profit margins and the woes had been compounded by problems in the US credit market, experts said, adding that the strong rupee had made exports unattractive.

Prakash Subramanian, managing director (capital market) of Standard Chartered Bank, said, “2008/09 is going to be a challenging year and there are definite signs of weakness.”

Given such a scenario, inflation at 7 per cent and commodity prices are big worries although prices of metals are showing some signs of softening.

Food prices will continue to pose a problem for some time to come. The government is expected to try and balance the spurt in prices through adequate fiscal, monetary and supply-side policy measures.

Ranjit Shahani, vice-chairman and managing director of Novartis, says, “Inflation is emerging as the single biggest economic (and political) concern for India Inc apart from the strong rupee. The political gains from the generous farm loan waiver announced in the Union budget are being quickly neutralised.”

The change in the mood is also reflected on Dalal Street where the benchmark Sensex has fallen 23 per cent from the 20,000 level to 15,500 level in the last three months. Alongside, the primary market that witnessed a record mobilisation of over Rs 45,000 crore in 2007 has taken a beating with many companies postponing or shelving their fund-raising plans.

The latest headache for India Inc is derivative losses. This has happened as its investments in overseas derivative instruments depreciated after the US subprime crisis. For most of the corporates, it’s only a mark-to-market loss and not a realised one.

“Derivative losses are a new threat to corporate profitability and one needs to know how many more corporates are affected. Corporates should disclose this in the annual results to make investors fully aware of the effect of this on the financials,” said the CEO of a leading firm.

Corporates are now busy calculating the impact of the fast-changing developments, both at home and abroad. The biggest challenge for companies would be to continue the growth momentum. Companies linked to the global economy will face bigger challenges in maintaining growth.

For investors, it’s time to have a relook at their portfolios. “Until the markets get more clarity on the ongoing problems and the government’s measures regarding inflation control, no sustainable rally is forseen,” says Bandyopadhyay. If the next monsoon turns out to be bad, demand will be hit again.

The Sensex gave a decent return of over 22 per cent in 2007, and this year it could stay in the range of 15 per cent on the lower side and 25-30 per cent on the higher side. Although the Indian economy will still grow by over 8 per cent, interest rates are unlikely to go down in the near term due to high inflation, making corporate captains keep their fingers crossed.

Bottom line suffers

•High interest rate hits the margins of auto, consumer goods companies

•Strong rupee impacts the bottom line of IT and export-oriented companies

•India Inc profit growth to slip from over 20% plus to between 15-20% in fourth quarter

•High inflation and interest rate levels remain major roadblocks for firms

•Corporates waiting for clarity on inflation control measures