Storm signals

The earnings season has begun in right earnest, and the first batch of results doesn’t look too good. The results of the 58 companies on the BSE 500 Index (that had declared results till the time of going to press), accounting for 22 per cent of its market capitalisation, points to a slowdown. Profits have taken a hit during the fourth quarter of 2007-08, though revenue growth has been robust.

EBIDTA for the sample companies rose 22 per cent YoY and net profit 18 per cent during the quarter. This is the slowest growth in the last seven quarters, stretching back to the second quarter of 2006-07.

These early trends indicate that corporate profitability has been impacted nearly 400 bps, both at the EBIDTA and net profit levels, for the financial year ended March 31, 2008 compared to the previous financial year. Says Ashok Jainani, Head (Research), Khandwala Securities: “We believe that profits have been impacted mainly due to higher interest costs, lower incidence of other income and higher input costs.” Analysts believe that there is another, potentially more damaging, reason for the pressure on margins— a demand slowdown. Says Jainani: “So far, companies have been able to partially pass on the rise in input costs to consumers as demand momentum provided traction. But this will become more difficult going forward.”

Higher interest rates have already started impacting volume growth in the auto and consumer durables segment. Its fallout can be seen in the results of Maruti-Suzuki India, which posted a 34 per cent decline in its Q4 net profit to Rs 297.6 crore compared to Rs 448.5 crore in the previous corresponding quarter.

The big picture The boom times are over, it seems. Results declared so far reveal margin pressures faced by companies High interest rate regime impacting earnings Rising costs of raw materials hurting growth Slowdown in domestic demand has also hit companies US recession and dollar depreciation are hurting India Inc. (particularly IT companies)

Cement companies, too, are facing a massive pressure on their operating margins due to the unprecedented rise in raw material costs, especially coal. The net profit of cement major ACC grew only marginally by 0.53 per cent to Rs 357.54 crore in the January to March quarter even as total income was up 7.68 per cent to Rs 1,861 crore.

The company admitted that the industry faces challenges of meeting steep cost escalations which exerts pressure on margins Then, there is the slowdown in the US to contend with, particularly for IT companies.Except for Satyam Computer Services, all the other Tier I information technology firms (Infosys Technologies, TCS, Wipro and HCL) reported poor sequential growth numbers. Infosys saw a nominal PAT increase of 1.46 per cent QoQ while total revenues were up 6.35 per cent. TCS actually reported a sequential decline in net profits by 6 per cent even as revenues were up 3 per cent. Says Hitesh Agrawal, Head (Research), Angel Broking: “Given the challenging business environment in the US, it’ll be tough for IT companies to deliver even on the muted guidance given by them for this year.”

Banking, however, is one sector that has beaten all expectations. Companies like HDFC Bank, AXIS Bank and YES Bank have already come out with their results. HDFC Bank’s net profit was up smartly by 37 per cent while total income was up over 50 per cent. AXIS Bank did even better, with bottom line expanding by 70 per cent. It also significantly improved its net interest margin. Although there were some provisions made on account of derivative losses incurred by their clients, the magnitude of such losses is not significant and eased concerns that banks may take a big hit on account of forex derivative losses.

Clearly, then, corporate earnings seem to have moderated due to a combination of several factors. And the adverse conditions are likely to persist for a while. This could leave a dent in India Inc.’s top and bottom lines going forward.