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Srividhya Sivakumar

BL Research Bureau Is this the beginning of the much talked about slowdown in India Inc’s earnings growth?

The initial take on the second quarter numbers of companies that have announced results so far, seems to suggest this. Numbers from the 670 companies that have so far declared their September numbers suggest that profit growth has slowed both compared to last year and the preceding quarter.

India Inc has notched up a 27.5-per-cent growth in net profit on the back of a 20-per-cent increase in revenues for the September quarter, compared to last year. While these numbers are healthy, one cannot overlook the slowdown in growth momentum. The same quarter last year saw corporate India record a higher 57 per cent increase in earnings, on the back of a similar 20 per cent growth in revenues. To add to this, the recent quarter has a seen a significant growth in the ‘other income’ component, highlighting a lower growth in earnings from operations.

“Other income” has increased by about 59 per cent as compared to last year’s 20 per cent. This could be driven partially by forex gains and improved returns on treasury, due to higher interest rates.

However, the good news is that the slowdown in profit growth did not result from pressures on profit margins.

Operating profit margins actually improved marginally from 26.1 per cent in the September 2006 quarter to 27.7 per cent in the recent one.

But increases in interest costs (43 per cent increase) and tax incidence (35 per cent growth in tax outgo), seem to have trimmed profit growth.

The quarter’s performance however, has to be seen in the light of the significant changes in business environment over the past year, with an appreciating rupee, interest rate increases and the global financial upheavals taking a toll on certain sectors.

It also needs to be noted that the 27.5-per-cent growth in India Inc’s profits is on a fairly high base, due to consecutive years of high growth.

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