The shaky ground beneath India Inc’s feet

Initial numbers for the March quarter show that Corporate India may close fiscal year 2014-15 with a lacklustre performance.

For the 309 companies for which results are out, sales growth slumped to 2 per cent. The two previous fiscals saw growth of 16 and 15 per cent, respectively.

Operating profits for the full year dipped 3 per cent. Adjusted net profits expanded 9 per cent, again a significant deceleration from the 15 and 17 per cent recorded in 2013-14 and 2012-13, respectively. The net profit picture would have been worse if not for the strong 32 per cent jump in ‘other income’, which companies make on non-core activities such as investments and asset sales.

The performance of Indian companies has been steadily worsening over the past three quarters. The recently concluded March quarter witnessed a steeper fall in revenues and slower profit growth than the December quarter.

Worsening trend For the March quarter, aggregate sales (for 350 companies) fell 7 per cent over the year-ago period, compared with the 1 per cent drop in the December 2014 quarter. Poor demand saw cement companies post a quarter of virtually no growth in sales while net profits slid 26 per cent. Engineering companies too saw a quarter of flat sales. This apart, the poor performance by biggies such as Reliance Industries dragged the aggregate.

Operating profits were flat, with cheaper raw materials compensated by higher ‘other’ expenses. A higher ‘other income’ component, however, managed to lift adjusted net profits by 3 per cent for the March 2015 quarter over the year ago. Even so, this growth is well below the 7 and 16 per cent in the December and September 2014 quarters.

Marginal gain The only silver lining is from the sequentially better operating and net profit margins, entirely due to the savings on raw materials. The raw material-to-sales ratio at 40 per cent for the March quarter is the lowest in at least six quarters.

Cheaper crude oil and derivatives enabled big savings for paint and FMCG companies. FMCG firms also gained on price corrections in various agricultural inputs such as palm oil. Cheaper metal prices, such as steel and copper, helped automobile companies reduce their raw material-cost-to-sales ratio by three percentage points to 70 per cent in the March 2015 quarter, from a year ago.

But, companies seem to have spent what they saved on input costs, on overheads. Staff costs, for instance, rose, accounting for 13.5 per cent of sales in the March quarter compared with 10.7 per cent in the comparable year-ago period. Software companies were mostly to blame for this — they increased overseas hiring, and IT biggie TCS’ bonus bonanza skewed the figure.

‘Other expenses’ too, at 21 per cent of sales, were significantly above the 17.8 per cent in the March 2014 quarter. Overall, the operating profit margin rose to 18.6 per cent for the March 2015 quarter against the 17.4 per cent a year ago. Of course, trends could change once more companies declare their results. But,with the rupee depreciating, material costs could move back up. Crude oil price is also showing signs of rising which can push up costs for several sectors.

On the revenue front, consumer-oriented companies could see growth slowing with rural consumption slacking off. Pick-up in the investment cycle too is yet to reflect in order books.

The going for India Inc, therefore, hardly looks promising at this point. Banking and finance companies have not been considered for this analysis.

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