Indian equities may be scaling new highs everyday, but India Inc’s fundamentals don’t quite justify this exuberance.

A preliminary analysis of 525 companies (excluding banks and financials) that have declared their December quarter results so far has not been encouraging. Their aggregate revenue has remained flat, compared with the same period last year. The only silver lining has been the lower raw material cost that has helped maintain the operating profit margin. Net profit growth is also down sharply to 1.9 per cent. This is much lower that the 16 per cent surge in September 2014.

Poor aggregate revenue

The poor aggregate revenue is despite 323 of the 525 companies seeing a rise in revenue during the December quarter. Sedate performances by large companies such as Reliance Industries, Sesa Sterlite, JSW Steel, Cairn India, Siemens and Ranbaxy Labs dragged the aggregate number. Sectors that saw considerable contraction in revenue during the quarter include oil and gas exploration, IT hardware, edible oil refining, agrochemicals, fertilisers, capital goods and mining.

Winners

But it was not all bad. With the real estate market on a recovery path, property developers, ceramic-tile manufacturers and cement producers have seen their revenue surge. Likewise, improvement in the sentiment led to higher discretionary spending which, in turn, spurred demand for consumer durables and other lifestyle goods such as branded apparels. Companies in the hospitality and entertainment space have also seen a pick up in business.

Even as the aggregate revenue growth remained muted, a global commodity price correction helped India Inc save in raw material costs. The aggregate raw material cost as a percentage of revenue fell from 50.2 per cent last year to 44.8 per cent in the December quarter.

Operating profit up

Sectors that managed to cut down their spending on raw materials include chemicals, steel, pharmaceuticals, auto ancillaries and non-electrical capital goods. For instance, ABC Bearings’ raw material cost fell 8.7 percentage points to 41 per cent of total revenue. Likewise, Ashok Leyland’s raw material spend as a percentage of revenue declined 5.2 percentage points to 74.5 per cent. Due to savings on raw material costs, India Inc managed to grow operating profit margins by 1.2 percentage points to 18.2 per cent despite higher employee costs, fuel and administrative expenses.

Bottomline hit

However, the better operating performance did not percolate to the bottomline due to higher interest costs and tax outgo. The aggregate reported profit rose a modest 1.9 per cent.

Companies in the construction, fertiliser, glass products, mining and agrochemicals space saw their net profit tank. Earnings of a few of them even slumped to less than a tenth of a year ago. However, many companies are yet to announce their third-quarter earnings. The numbers can hence change at end of the earnings season.

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