Losing fizz

India Inc’s scorecard for the latest quarterly results season is its weakest since this recovery began. The July-September quarter saw 3,300 companies report an 8 per cent growth in operating profits year-on-year, down from the double-digit growth rates recorded in each of the four preceding quarters. Aggregate sales growth too has dipped to a worrying 3.2 per cent, from 10 per cent plus levels. If net profits present a healthy picture, this is because of one-off items such as asset sales and investment income, which cannot be sustained. While corporate profit growth seems to be fizzling out, divergence in growth rates between companies and sectors continues to be high.

Three key trends have underpinned these numbers and have implications for the coming quarters. To start with, while animal spirits post-election have buoyed consumer confidence and lifted prospects for sectors such as consumer appliances, automobiles, telecom and private banks, industrial sectors such as capital goods and utilities remain sluggish. Here, large players such as L&T have managed to improve execution cycles, but order flows haven’t perked up much despite recent efforts to streamline the awarding of bids. Two, with the benefits from a depreciating rupee beginning to wear off, export-oriented sectors such as technology are slowing down, while sectors such as cement, steel and power which use imported inputs are earning better margins. Finally, commodity companies from segments such as oil and gas and metals have reported weak numbers this quarter. This is a reminder that while falling global crude oil and commodity prices may be good news for many mid- and small-sized members of India Inc, this is shrinking the realisations and margins for quite a few index bellwethers. Overall, the results show that policymakers cannot afford to take their eyes off the ball yet and must persist with trying to draw in foreign investment, expedite project clearances and push ahead with the allocation of critical natural resources. India Inc too must take note that while falling inflation may be good for consumer demand, it robs them of pricing power. Sectors which are up against slowing sales may have to consider serious belt-tightening and ruthlessly trim product prices to revive volumes.

With quarterly profits for Sensex companies growing at a mere 5 per cent and falling well short of the market expectations of 10-11 per cent, the recent numbers are a wake-up call to stock market investors too. The bulk of market gains in the past year have come from an expansion in price-earnings (PE) multiples for Indian stocks, predicated on the hope that companies will sustain double-digit growth over the next 3 to 5 years. At 28,500 levels, the Sensex now trades at a PE of 19 times and factors in a 14 per cent earnings growth. But after the recent earnings disappointments, investors may hesitate to take the indices higher without further evidence that corporate profits are moving into a higher trajectory on a sustainable basis.

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