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Vidya Bala

BL Research Bureau The slowdown in India Inc’s profit growth is now old news.

The 700-odd companies which have declared numbers for the September quarter reported only a 13 per cent growth in net profit, on the back of a 29 per cent growth in sales over the same period last year. Such a slowdown has already been factored in by the markets, given the measly price earnings multiple at which stocks are currently trading.

However, the wide divergence in the profit growth of companies suggests that not all companies deserve to be meted out the same treatment by the stock markets. Here’s why.

Over 222 companies, 30 per cent of the universe, managed a profit growth of 25 per cent or more and 157 companies (one in five) actually registered a 50 per cent plus growth. Over 350 companies, or 48 per cent of the universe, managed higher earnings in September 2008 compared to September 2007. In other words, one half of the universe has witnessed positive earnings growth. This is despite a 10 per cent decline in ‘other income’.

However, fewer companies delivered growth this year. In the same quarter of last year, about 57 per cent of the companies (from this universe) demonstrated earnings growth. Higher input costs and interest charges were among the prime reasons for companies reporting lower earnings in the latest quarter. Growth in sales remained high, driven partly by inflationary price trends.

A further breakdown of the growth in profits also suggests a fair degree of earnings divergence. While one-fifth of the companies in the universe have clocked a growth rate of 50 per cent or more amidst a slowdown and other macro issues, 35 per cent reported a decline in earnings.

Companies from the banking sector and those with rich cash coffers are largely the constituents of the outperforming segment. The stand-out performances from companies such as Educomp Solutions, Akruti City, Alstom Projects and Tech Mahindra, which fall under the mid-cap market segment, suggests that stocks in the mid-cap universe too have managed to impress under tough conditions.

Despite higher risks to growth, the number of loss-making companies did not materially change over the past one year. Not surprisingly, four out of every five companies that made losses, were in the sub-Rs1,000 crore market cap segment. Undeniably, this segment has been the most affected by higher commodity prices in the earlier quarters and stretched working capital cycles forcing higher borrowing costs in the recent quarters.

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