OPERATING MARGINS A BRIGHT SPOT Revenue Growth in Q4 Slowest in Over 2 Years

India Inc's revenues grew at their slowest pace in more than two years, stung by a slump in investments, policy inertia and rising cost of inputs, according to an ET study. 

An analysis of 2,302 listed companies shows a 13.5% year-on-year revenue growth for the quarter to March, as against 19.3% in the December quarter and 17.8% in the three months to September. The analysis, which excluded companies in the finance and petroleum sectors, covered performances for the last 13 quarters. But it is not all gloom and doom. The analysis also shows that firms recorded an improvement in operating margins and debt servicing. 

India Inc's operating profit margins improved from the December quarter, as did the interest coverage ratio — a matrix that measures a firm's ability to pay interest on borrowings. Even the year-on-year fall in net profit was lower in the March quarter, compared with that in the previous two quarters. 

Although both operating profit margin and interest coverage ratio were below the year-ago figures, the levels reflect a pause in the downtrend in companies' margins and profitability throughout 2011. 

The biggest challenge for Indian companies, the study notes, is the slowdown in revenue growth. Net Profit Fall Lower Than Q2 and Q3 

The slowdown in revenue growth coincided with the disappointing March-quarter GDP growth. GDP rose 5.3% in the three months to March from a year ago, the lowest in nine years, dragged down by a moderation in services and consumption. "Sales growth has slowed down in the last quarter of FY12, reflecting the slowdown in GDP growth. We expect it to be on a slower trajectory in FY13, vis-àvis FY12," said Bhupinder Sethi, head of equities at Tata Asset Management. 

According to the study, India Inc's interest costs in the March quarter jumped 47.4% to . 30,123 crore, a record high at 3.47% of revenues. It was also the eighth consecutive quarter of high, double-digit rise in interest costs. 

On the brighter side, the Marchquarter net profit for the companies under review was down only 8% from the year-ago period, marking an improvement over the 20.6% fall in the December quarter and 37.9% drop in the September quarter. India Inc's operating profit margins for the March quarter stood at 14.3%, an improvement from the preceding two quarters, but down 200 basis points from the previous corresponding quarter. One basis point is one-hundredth of a percentage point. 

The interest coverage ratio stood at 3.8, which was higher than the preceding two quarters but down 170 basis points y-o-y. The ratio had dipped to 3.4 in the December quarter. Tata Asset Management's Sethi said, "While margin pressures seem to have bottomed out, finance costs have impacted bottom lines. Companies with leveraged balance sheets may thus continue to see pain for some more time." Exportoriented sectors should do well in FY13, he added. 

With two months into the June quarter, two key events — over 10% depreciation in the rupee and the Reserve Bank's 50-bps cut in interest rates — are set to impact corporate performance for the quarter. Birla Sun Life Asset Management CEO A Balasubramanian said, "We expect business pressures to persist in the first half of FY13. If interest rates were to ease, as is anticipated since the RBI is now expected to support growth, there will be a revival in sentiments and the investment cycle can then pick up from the second half." 

But not everyone believes the pain is over yet. "I am not very optimistic about the broader environment," said Kenneth Andrade, head of investments at IDFC Asset Management. "Even if the government swings into action, we still have challenges. The economy is slowing at a fast pace, there are concerns on order books, capital expenditure has come to a grinding halt," Andrade said, adding, "Even though consumerism has not faced much of a problem yet, it may also slow down if the overall economic situation fails to improve." 

(With inputs from Bakul Chugan Tongia and Shailesh Kadam)