India Inc is still not out of the woods going by the initial set of numbers that have been put out for the April-June quarter. But there is a silver lining in terms of a stronger operational performance and signs of a likely pick-up in urban consumption.

While net sales of the 556 listed companies whose results have been announced so far dropped 4.3 per cent over April-June 2014, a sharp decline in costs boosted operational performance and helped improve profits.

With the economy still stuck in first gear, sectors such as infrastructure, construction and power generation have seen a drag on the top-line. Others, such as cement and capital goods, just about managed 1-2 per cent growth. While the crash in commodity prices has affected industries such as steel, gems and jewellery sales fell on poor demand, despite gold prices falling.

Stronger performance

Despite this, there was a marginal growth in earnings. Adjusted net profits for the 556 companies grew 3.2 per cent in the June 2015 quarter.

A key positive is that profit growth has been supported by stronger operational performance and not ‘other income’, or earnings from non-core activities such as treasury and/or sale of assets. ‘Other income’ dropped 8.5 per cent year-on-year, while operating profit grew 10 per cent. In fact, the operating profit growth is the highest in three quarters.

This has primarily been aided by benign raw material prices. The raw material-to-sales ratio stands at 44 per cent, the lowest in the last few quarters.

Correspondingly, operating margins were at a strong 18 per cent. Raw material-intensive sectors such as auto are a major beneficiary of this trend. For instance, lower metal input costs, apart from other factors, helped Bajaj Auto and Maruti Suzuki increase net profit by 37 per cent and 56 per cent, respectively, despite top-line growth of only 7 per cent and 18 per cent. Cheaper crude derivatives shored up margins and the bottomline for paint companies Asian Paints and Nerolac. FMCG makers gained from downward revisions in agricultural inputs and palm oil.

Overall, some companies in the car, media and entertainment, consumer durables and hotel segments are noteworthy for their double-digit sales and profit growth. Blue Star, Cera Sanitaryware, Godrej Consumer, Somany Ceramics, Maruti Suzuki, PVR and Inox Leisure are some examples.

This points to a likely pick-up in urban consumption. With inflation cooling off and interest rates trending downwards, this could further catch on. Commodity prices are not expected to play villain in the next few months. If investments speed up and translate into orders, double-digit growth in sales and profits may follow.

But keep in mind that this is only the first take and the final picture can change.

Banking and finance companies have not been considered for this analysis.

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