Indian economy has already started,but next round of growth in profit should come from topline

The performance of India Inc.in Jun '09 Quarter indicates that recovery process in Indian economy has already started,but next round of growth in profit should come from topline. Investors need to keep an eye on demand growth for next two quarters,says Santanu Mishra  AFTER two tough quarters (December '08 and March '09) the Indian economy's performance between April and June shows signs that the slowdown is being arrested. A stable government at the centre, rise in domestic demand and falling input costs are all aiding the economic recovery. The stock market, supposed to be a leading indicator of any economy, has already responded in a positive manner. Even, the foreign investors are betting on India growth story.      In light of all these developments, ET Intelligence Group (ETIG) undertook detailed analysis of the results of 2,219 companies during the June '09 quarter to better understand how India Inc is faring and what it means for the economy. While aggregate net sales of these companies grew at 3.5% compared to the same period last year, the growth in topline is more or less similar to what was seen in the Mar '09 quarter, probably indicating that declining rates of growth are nearing an end.      The profitability numbers present a very interesting picture. The year-on-year (y-o-y) growth in aggregate operating and net profit has moved into positive territory, thanks to falling input costs and lower operating expenses. Both of these profitability figures were in the negative growth zone in the quarters between October and March. Operating and net profit grew at a faster pace of around 8% each. Both of these declined by 6.5% and 15.6% respectively during the March quarter.      Lower raw material costs, decline in prices of fuel and power, and cost rationalisation initiatives are some of the factors that helped companies improve their profitability. The prices of many commodities, key raw materials in industrial operation, are 40-50% lower compared to the same period last year. As a result, the cost of raw material which typically accounts for around 45-50% of net sales declined by 100 basis points in relation to sales.      These factors boosted the operating margin, which expanded by 300 basis points and 500 basis points compared to March and December quarters of the last financial year respectively. Also, the operating margin at 19.2% has returned to its historical average level. This might provide some relief to companies, which in recent times were busy protecting their margin rather than improving the top-line.      This time around, the signs of recovery are visible both in the manufacturing and services sectors. The year-on-year growth in topline is still far behind their previous year level; the decline in growth rate has got arrested though. For instance, the y-o-y growth rate in net sales for manufacturing sector contracted only by 100 basis points compared to the 500 basis points contraction seen during the Mar '09 quarter. In terms of profitability, the companies in services sector have outperformed their manufacturing peers.      The aggregate operating profit of services companies grew at a faster rate of 14% as against 5% for manufacturing companies. However, it should be appreciated that manufacturing companies have managed to come out of the red zone. For instance, the aggregate operating profit of manufacturing companies declined by 12% and 31% during the March and December quarters respectively.      The higher operating profit coupled with significant jump in other income resulted in higher growth in net profit. The 43% jump in other income is the highest in the past 8 quarters. For some of the companies, foreign exchange gain is a significant portion of such other income. Buoyed by such rise in other income, the aggregate net profit for the Jun '09 quarter grew by 8.8% compared to the same period last year. In the absence of other income, the growth in net profit, however, would have remained muted.      Overall, though India Inc. has shown signs of recovery, the degree of recovery, however, vary across sectors. While some sectors have recovered at a faster pace, others are still struggling. Sectors like auto, cement, FMCG and power have shown relatively better performance. One reason for this is that most of the companies in these sectors, except for auto, are focused only on the domestic market in general and the rural market in particular.      The Indian rural market has remained resilient to the recent slowdown and has also received significant stimulus from the government. Even within auto, the growth has come mainly from the domestic market. On the other hand, sectors like hospitality, real estate and shipping are still grappling with the impact of slowdown. The experts believe that these sectors will take slightly longer time to recover compared to other sectors. To help our readers realign their portfolios, ET Intelligence Group carried out detailed analysis of sectors and companies which have relatively outperformed and underperformed. For details, please turn to the page 2.      The analysis also reveals that bigger companies are recovering faster than small and mid-sized ones. The aggregate net sales of large and midsized companies grew at around 7% compared to a 2.6% decline for small-sized companies. The bigger a company, the more resistant it is to economic slowdown and higher its market-share post recovery. The large companies have also managed their operating efficiencies better. The aggregate operating profit of both large and mid-sized companies grew at around 11% compared to 1% growth for smallsized companies.      The economy recovery has also reduced the number of companies making losses. The number of companies making losses has also come down to 472 in the Jun '09 quarter from 712 during the preceding two quarters. This should provide some solace to small and mid sized companies that are the ones that mainly figure in such a list of loss making companies.      Also, there is an improvement in number of turn-around (making losses in one quarter and profit in next quarter) companies in Jun '09 quarter. For instance, there were 373 companies which turned-around in June quarter compared to 300 in March quarter.      Though results in the April-June quarter signal the beginning of the recovery process, the next two quarters must be carefully watched for further confirmation. Most of the profit in the current quarter has come from lower operating expenses. Going forward, the companies need to grow their topline in order to boost their bottomline. This is because there may not be further significant expansion in operating margin, which has reached its historical average. Hence, investors need to keep an eye on demand more than the cost control measures by companies.      For the purpose of this analysis, we have excluded banking, financial and oil & gas companies from our sample since these sectors are highly regulated by government and also have a different financial reporting structure which usually distort the overall picture.      santanu.mishra@timesgroup.com