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India Inc slips into negative territory

S. Vaidya Nathan

BL Research Bureau

THE effects of the slowdown in the economy are there for all to see in the July-September 2001 quarter. The profits of 1000 major companies have declined by 4.7 per cent. More importantly, the revenue growth slipped into the negative terrain and is down by 1.4 per cent as compared to the corresponding quarter of 2000.

The slippage in earnings growth is despite the improvement in operating efficiencies and cost control and a sharp spurt of 38.3 per cent in other income. But for the spurt in other income driven by active treasury management by finance sector companies a nd some big companies in the manufacturing sector, the decline in earnings may have been in double digits.

As more earnings announcements came in from the economically sensitive and commodity sector companies in the last week, the picture has changed for the worse. Oil, steel, paper and select cement companies have shown dips in profitability.

Oil sector companies have suffered sharp decline in profits due to a fall in refinery margins. Indian Oil, BPCL, Chennai Petroleum, Bongaigon Refinery among others have led the downtrend in this sector. Reliance Petroleum has managed to show a 10.8 per c ent growth in profits.

In other sectors, Tata Steel, Grasim and Madras Cements have all reported decline in profits. The one notable earnings number came from Tata Engineering which has managed to cut losses through better offtake and cost control.

Overall the earnings numbers seem to support what is happening in the economy. But there are a few bright spots here and there. In terms of sectors, the bright spots have been pharmaceutical, finance (banks/housing finance companies) and two-wheelers. Dr Reddy's Laboratories has been the sterling show of the quarter with a hefty jump in profits as it taps the US markets.

In other sectors such as cement and software the story is a mixed bag with a few companies posting impressive numbers. Quite a few others have suffered a decline in profits.

India Inc does not seem to have made any effective check on interest costs. The decline in interest costs are more or less in line with those in revenues. This is somewhat surprising considering the trend of lower interest rates. It points to either an i nventory build-up in select sectors or a spurt in receivables.

Depreciation charges have shown a marginal decline. This once again points to the lack of fresh asset creation in the economy. Tax provisions have risen as some companies have provided for deferred tax liability in accordance with the changed accounting framework.

Most companies may do this provisioning at the end of the year. There could be a negative surprise here as the fiscal year 2001-02 goes by.

Overall, the picture is not one that provides an inspiring scenario. If the recent pick-up in the automobile sector and cement sustain, there could be some improvement in the next quarter. But commodity sector companies could continue to suffer from poor pricing power which could affect profitability. This may tell on the bottomline growth as would a flattening-out in the tech sector.