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Sunday, Feb 10, 2002

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Harsh winter for India Inc; only pharma, auto do well

S. Vaidya Nathan

THE numbers for India Inc in the October-December 2001 quarter are chilling. Revenues fell by 2.7 per cent as compared to the corresponding quarter of 2000 and earnings by 3 per cent. Compared to the immediate preceding quarter (July-September 2001) too, there is no evidence of any improvement in revenues and profits.

The analysis covers 2,300 companies. What strikes one is the fact that revenue is under considerable stress except in the pharma and auto sectors, which have posted growth rates of 31.8 and 14.6 per cent respectively.

The software and finance sectors saw revenues rise by 5.8 per cent.

For the software sector, this does represent a major climbdown after growth rates in the vicinity of 35-40 per cent for the last few years. With projects drying and benching levels of employees up, operating profits have risen by just 0.6 per cent and sustainable earnings have actually declined 6.5 per cent.

This is despite a 24.9 per cent jump in other income courtesy the cash chests held by majors such as Infosys and Wipro. With industry majors showing no signs of bullishness, the picture may not change much in the quarter ahead.

The finance sector revenues reveal the sluggish undertone in credit offtake as well as the decline in interest rates. The fact that costs have gone by 8.4 per cent while revenues have moved up 5.8 per cent shows the squeeze on spreads as the sector's deposits take time to get adjusted to lower rates. A spike in provisioning by financial institutions has neutralised the 35.1 per cent jump in other income. The latter was on account of the rally in bond prices following rate cuts by the RBI and active treasury operations.

In the economically sensitive sectors, the story has been positive only in the auto sector — two-wheelers in particular. Tata Engineering also had a good quarter, cutting losses by half with higher sales of commercial vehicles and its Indica V2 version. With small price increases and cost control measures, expenditure growth has been held under check.

This is the only sector apart from pharma where expenditure has been lower than revenue growth. Two-wheeler majors - Hero Honda and Bajaj Auto - have turned in an impressive show while TVS Motor appears set to follow suit in the quarter ahead.

Other economically sensitive sectors witnessed major erosion in profitability with earnings down by 53.5 per cent. The pressure on commodity prices, the lower volumes in sectors such as steel and petrochemicals, rise in tax provisions and a marginal growth in other income have placed these sectors in considerable difficulty. Unless pricing pressures ease, the going may not be any easier.

In what was a period of festivities, which saw a surge in sales of consumer products, consumer product companies have seen sales decline by 2.7 per cent and earnings by 17.5 per cent. Though some segments have recorded growth, by and large, weak rural purchasing power continues to dog the sector. Even industry majors Hindustan Lever and ITC managed a modest growth in operating profits of 16 per cent and 13 per cent respectively. A sharp jump in tax provisioning has made the picture worse as, before tax, earnings are down only by 5.4 per cent.

Amidst a gloomy picture, the pharma sector seems to be in the pink of health. Indian pharma companies such as Dr Reddy's, Ranbaxy and Sun Pharma among others have done well. Export markets in generics have driven Dr Reddy's and Ranbaxy to yet another strong quarter. Among MNC pharma companies, only Pfizer has stood out. With a 31.8 per cent growth in sales and 59.7 per cent rise in sustainable earnings, pharmaceutical companies have shown resilience. But the overall picture is hardly inspiring and unless economic trends reverse quickly, the stress on cash flows may make matters more difficult.

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