False dawn

Corporate India has managed a 20 per cent-plus expansion in net profits in the second quarter of the current fiscal. On the face of it, this might suggest that the organised sector of the industry has managed to insulate itself from the overall situation of sluggish industrial growth, stalled public and private investments and a fluid global scenario. But a deeper analysis of the numbers reveals that there are worry lines in the performance and that prospects of it being sustained in the future are far from certain. To start with, the improvement in corporate profit growth since June has been powered mainly by falling input costs – thanks to a correction in basic materials from steel and iron ore to coal and plastics as a response to the global slowdown. The unexpected appreciation in the rupee over the last quarter has also helped trim input costs. But even as profit margins have been improving, what is more significant is that growth rates in revenues in successive quarters have been rapidly losing steam. The aggregate sales growth of these companies, at 12.6 per cent in July-September 2012, is at its lowest level since the 2009 slump. It has nearly halved from levels two years ago.

It also needs mention that this expansion is aided more by companies resorting to successive selling price increases than by sales volumes. After adjusting for inflation rates of 7.5 per cent, the real growth managed by India Inc for the quarter would dwindle to 5 per cent. This is a clear sign that the offtake of products and services, the key determinant of corporate India’s fortunes, is weak indeed. This conclusion is also supported by anecdotal evidence from sectors such as telecom, FMCGs, and cement, where revenues, if they have grown at all, have been driven more by increases in selling price, than by offtake. The sluggish sales also put paid to the notion that listed companies, representing the leading lights of India Inc, can comfortably deliver 1.5 or even 2 times the growth that the broader economy manages. In the recent quarter, it appears, they have had trouble even keeping pace with GDP. Obviously, without top line growth, savings on raw material costs can only go so far in helping companies deliver higher profits. To make matters worse, the beneficial effect of a stronger rupee also appears to be waning and this may convert the forex gains of this quarter into losses in the next.

To put corporate India back on a sustainable growth path, policymakers may have to go all-out to stimulate fresh investments and revive consumer confidence. Smoothing out impediments to investments in the form of complex land acquisition norms, glitches in resource allocation and clarity on mining rights may help achieve the first goal. But companies on their part too must do their bit to ensure that their recent profit growth is sustained. Having passed on every small increase in raw material prices to end consumers in better times, they may now have to tighten their belts and sacrifice some of that pricing power to stimulate demand. They must also use the window of opportunity provided by the recent commodity price declines to hedge their exposures and lock into recent cost savings for the medium term.

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