The Hindu Business Line : India Inc notches up a high score

While sectors such as telecom, banking and construction sustained their growth rates, growth has been slower in IT and automobiles. Overall, however, Corporate India's earnings card has rekindled investor interest in the India story.

Corporate India has put up yet another laudable performance for the quarter ended March 2007, with both revenues and earnings growing briskly despite mounting pressure from rising interest rates.

Corporate India's revenues for the March quarter of 2006-07 grew about 26 per cent while earnings increased by about 43 per cent on a year-on-year basis (the picture was better without "other income", which grew 19 per cent).

This analysis is based on the numbers reported by about 1,800 companies that have announced their results so far. While sectors such as telecom, banks, construction and engineering sustained their growth rates; there has been a perceptible slowdown in information technology and automobiles. Here is a brief sector-wise snapshot of results:

Construction: Building strength

Construction and infrastructure companies continued to notch up robust revenue growth thanks to the Government's thrust on infrastructure development. While revenue expansion was strong, earnings growth trailed, with increased input and interest costs and depreciation taking a toll.

Sobha Developers and Parsvnath Developers registered impressive numbers. Prajay Engineers, helped by a three-fold growth in revenues, quadrupled its profits. While projects bagged in the preceding quarters led to a scaling up of revenues for these companies, the sustainability of these numbers will depend on future order flows. Madhucon Projects, ITD Cementation, Hindustan Construction and Noida Toll Bridge were among companies that witnessed a slowdown in profit growth.

Engineering: Powered by growth

Strong demand from user industries translated into a more-than-satisfactory scorecard for engineering companies, which witnessed a 47 per cent increase in revenues and 58 per cent growth in earnings. However, rising interest costs could be a dampener, given that most of the companies have lined up significant capex plans.

Praj Industries, aided by a doubling of revenues, stable operating margins and a lower tax incidence, almost tripled its quarterly earnings. Among other companies that fared well in this sector were Kalindee Rail Nirman, Electrotherm, TRF and Alstom Projects.

Cement: DEMAND INTACT

Cement companies saw a lower level of earnings growth than last year; registering a 35 per cent increase in revenues with about 50 per cent expansion in earnings over the year. Though revenue growth was strong, that of earnings seemed to have slowed. This could be attributed to the base effect caused by the relatively firm trends in cement prices since last year.

Going forward, limited capacity addition and tight utilisation on the back of healthy demand growth could cap revenue expansion, while government intervention and the one-year price freeze could also put pressure on margins. India Cements, continuing its strong performance, registered a five-fold increase in earnings. Improved pricing and utilisation, coupled with an expansion in operating margin, helped raise earnings.

Telecom: Good times to continue

Huge subscriber additions sustained the momentum in earnings. While the delay in the verification of the subscriber base could have led to the blip in additions in February, there were a host of other positive factors for service providers.

The reduction in the Access Deficit Charges translated into higher margins in the short term. Over the medium term, as companies pass on these benefits to users by way of reductions in international long-distance and roaming charges, there is likely to be pressure on the average revenue per user (ARPU). However, this is eventually expected to be offset by higher usage.

Bharti Airtel posted an impressive performance, with a 150 per cent rise in earnings. This jump in profits was mainly due to volume growth on account of lower call rates and network expansion. Reliance Communication and Idea Cellular also more than doubled their earnings.

In contrast, MTNL's revenues declined about 17 per cent due to a fall in tariffs and ARPU. However, propped up by a 63 per cent increase in `other income', earnings registered 47 per cent growth.

Software: Beats perception

Notwithstanding expectations of a US slowdown and sharp rupee appreciation, software majors including Infosys, TCS and Satyam Computers just about beat the moderate market expectations. Regardless of a 43 per cent increase in earnings, there was a marked slowdown in volume growth.

Sluggish growth in the financial service segment could be attributed to slower volume increase. Operating profits decelerated (30 per cent growth this quarter) compared to last year. Higher wage inflation, a strengthening rupee and a higher onsite proportion of revenues deflated operating profits.

Select small- and medium-size software firms, however, witnessed high growth rates. While overall revenues over the quarter rose by about 46 per cent, earnings grew about 71 per cent. iGate Global Solutions, KLG Systel and Tanla Solutions more than tripled their earnings over the quarter. Geometric Software and Saksoft, however, reported a negative growth in earnings.

Banks: Regulatory changes cap earnings

Bucking the previous quarter's trend, public sector banks outpaced their private counterparts in earnings growth. While public sector banks clocked earnings growth of about 39 per cent over the quarter, private banks' bottomlines grew just 24 per cent.

The quarter, marked by the increased concern on inflation and liquidity, saw the Reserve Bank of India introducing a few regulatory changes.

Hike in the CRR (cash reserve ratio) and increase in provisioning requirements on standard assets could also be reasons for slower earnings growth of banks which have a higher exposure to retail and consumer loans.

Among mid-tier banks, Indian Bank, Bank of India and Union Bank recorded good earnings growth.

State Bank of India, the country's largest bank, recorded a 75 per cent increase in earnings for the fourth quarter. However, a substantial increase in NPAs (non-performing assets) provisioning and higher tax incidence pressured net interest income leading to a muted earnings picture for the year.

ICICI Bank, on the other hand, had a lacklustre quarter with about 4.4 per cent growth in profits. Increase in general provisioning requirements took its toll on the earnings.

For fiscal 2007, backed by a higher net interest income, the bank notched up a 22 per cent increase in earnings over the year. Net interest margins, however, declined by 17 percentage points.

Auto: Pressure on margins

Notwithstanding the reasonable volume growth in passenger cars, commercial vehicles and three-wheelers, rising input costs severely pressured margins for auto companies. Tata Motors, despite a 20 per cent increase in volumes, reported a 7 per cent drop in operating profit margins (OPM).

Ashok Leyland also registered 8 per cent shrinkage in OPMs, while its revenues grew about 32 per cent.

Maruti Udyog saw a 16 per cent contraction in OPM despite a 35 per cent rise in volumes.

Growing competition, rising interest rates and higher down-payment demands from financing institutions, in general, led to a postponement of purchases and impacted quarterly sales in the two-wheeler segment. Bajaj Auto witnessed a 7 per cent growth in revenues, and Hero Honda 17 per cent, though earnings were lower for both the companies.

Sugar: Bitterness prevails

Excess supply and lower prices continued to mar the sector's profitability. While revenues remained flat, lower realisation and rising costs weighed heavily on earnings, with most sugar companies posting lacklustre earnings numbers.

Earnings declined for Bajaj Hindusthan, Shree Renuka Sugar and Balrampur Chini Mills, while EID Parry, Simbhaoli Sugar and Oudh Sugar registered losses.

The big picture

One key facet of the quarterly performance is that mid-cap companies outpaced the bellwethers, both in revenue and profit growth.

This runs contrary to the conventional wisdom that mid-cap companies usually under-perform in a rising interest rate cycle. However, it may be early days yet to jump to any conclusions on this score.

The RBI's decision to hike interest rates in an effort to combat rising inflation could yet have a lag effect on the earnings of select capital-intensive sectors.

Overall, Corporate India's earnings card has rekindled investors' confidence in the India story, notwithstanding a few dark spots.

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