Impact of the global meltdown on the results of 1,925 companies

A bad quarter has just passed. ETIG's Ramkrishna Kashelkar & Priya Kansara Pandya study the impact of the global meltdown on the results of 1,925 companies

    When we predicted further deterioration in India Inc's performance while analysing numbers for Sep '08 quarter, even we had not anticipated the sort of massive and all pervasive fall that corporate India reported during the Dec'08 quarter. We were surprised to find that the aggregate net profits of 1,925 companies in our sample nearly halved in the third quarter compared to December 2007 quarter — an unprecedented crash in atleast last 20 quarters. And the journey going forward may only be marginally better than the quarter gone by.
    The factors impacting the results were numerous and very few companies could escape these. The global economic environment turned negative with the key global financial institutions going bust. The credit markets choked up and interest rates soared. The economic turmoil resulted in a substantial reduction in consumption leading to decrease in production and trade. A string of layoffs across industries worsened the scenario and the largest economies in the world fell into a recession. US, which is the world's single largest economy is reeling under the 16-year high unemployment level and its economy is expected to contract by a 1.5% in 2009.
    Although India has not been at the epicentre of this crisis, it did not remain insulated from the tremors. The global credit squeeze resulted in fall in India's exports adding pressure to the export oriented industries such as textiles and gems and jewellery. During the last two months of 2008, India's merchandise exports fell by over 10% against the year ago period notwithstanding the weaker rupee against the dollar. Industries, that are directly dependent on availability of consumer credit such as automobiles and real estate, also took a hit. Crash in the commodity prices and a resultant slowdown in demand meant that the companies in the commodity business such as metals or chemicals had a tough time. Most of the services industries such
as hospitality, shipping & logistics, etc, turned out to be the indirect victims. As a result, India's economic growth is likely to fall below 7% in FY 2009, much below the 5-year average of over 8.5%.
    As an outcome of these difficult times, the foreign institutions pulled money out of the Indian stock market, leaving rupee sharply weakened during the quarter. This forced a large number of Indian companies book hefty foreign exchange losses in line with the new accounting standards. It worsened the matters further; as most of these corporates had booked forex gains on a strong rupee in the December 2007 quarter.
UNPRECEDENTED FALL
    With a number of leading companies posting historic low profits, if not losses, we had a feeling that the quarter would turn out to be really bad. We studied the results of 1,925 listed companies, excluding banks and non-banking financial companies (NBFCs) — as their revenue recognition differs from the rest of the companies — and four oil majors, which could distort the overall picture due to their sheer size and magnitude of losses. We were not surprised to find that just a few industries posted year-on-year profit growth in the Dec '08 quarter. A vast majority of the sectors we analysed posted a marked fall in profits against the comparable period of the previous year.
    Although the net sales for the quarter were 13.3% higher against the year ago period, the operating profit fell 26.4%. As costs continued to increase at a higher rate compared to the increase in net sales, the profit margins weakened to mere 11.6%, which is lowest in last 20 quarters at least. Those Who Braved The Avalanche
    The staff cost of India Inc, which averaged at 6.9% of its net sales in last 20 quarters, stood at 8.5% during the December quarter. In a similar manner, the interest burden rose to 3.1% of net sales against a 20-quarter average of 2.2%. Depreciation cost scaled up to 3.8% of net sales — something witnessed only prior to 2005. The resultant pretax profits were 48.2% below the December 2007 level and the PAT was 48.7% lower.
A FEW IN THE BLACK
    It was really a tough task to identify sectors, which posted a growth in profits in the December 2008 quarter. Even the sectors regarded as 'value preservers' in times of slowdown — the fast moving consumer goods and pharmaceuticals — did badly. The pharma industry reported a massive 81.8% fall in net profits during the quarter, while FMCG reported 29.5% fall. The Infotech industry, which gains when rupee depreciates, also posted a minor 0.9% fall in the aggregate PAT level during the quarter.
    Sugar sector was among those precious few that bucked the overall gloom in the economy. The aggregate profit of 24 sugar companies stood at Rs 47.7 crore in the December 2008 quarter. These had reported losses in the corresponding quarter of the previous year. The sector being seasonal in nature had posted substantially higher profits in the September 2008 quarter.
    India's telecom services sector has been doing well over last few years . With Tata Communications and Bharati Airtel posting healthy results, the industry reported a 43.2% spurt in profits, which was best in last five quarters.
    The power generation sector also posted its best results in the preceding five quarters with a 12.1% growth in net profits. Higher profits reported by NTPC, Jaiprakash Hydro and Torrent Power lifted the sector. Apart from these, the other sectors that did well were agro-inputs sectors such as pesticides and fertilisers.
WILL THERE BE A REPEAT?
    Among these sectors, the telecom industry is likely to maintain the higher subscriber growth. Although the average per user revenue is on a downswing, the impending launch of 3G services should support it.
    Power and fertiliser industries, besides the natural gas transporters such as Gail, are likely to benefit from the higher availability of natural gas once RIL's KG basin gas fields commences operations from end of the current month. The sugar industry is also likely to perform well over next couple of quarters from higher prices due to the estimated sugar shortfall in the country. The aggressive interest rate cuts and stimulus packages declared by the government are likely to lift the domestic sentiments. The consumption confidence in India seems to be returning. The automobiles companies have reported healthy January month sales. The cement despatches reported by India's largest cement producer ACC in the month of January '09 have also improved.
GOING FORWARD
    The quarter gone by was indeed very painful. Corporate India's results in entire year 2009 are expected to remain under pressure. Whereas, a slowdown hits the smaller companies harder, the larger companies are better equipped to weather such turmoil. Hence, it will be a good strategy to invest in companies, which are financially strong.
    ramkrishna.kashelkar-@timesgroup.com