India Inc in Q-1 -- Uncertain picture

Krishnan Thiagarajan

FOR industrialists, market players, investors and analysts awaiting signs of Corporate India's economic recovery, the first quarter report card presents a mixed picture.

While the earnings performance of such industry segments as automobiles (particularly LCVs/HCVs), refineries and cement was disappointing, other economically sensitive and commodity sectors, such as steel, non-ferrous metals, paper and petrochemicals, did quite well.

As some external variables were at play in industries such as automobiles (rationalisation of sales tax) and refineries (higher depreciation charge), the poor performance by these sectors can hardly be attributed to a slowdown in the economy.

In the absence of firm indications of a sustainable uptrend in prices and volumes in steel, non-ferrous metals or cement in the coming quarters, the economic scenario remains hazy. Analysts fear that the lack of both capital investment and sustained domestic demand may hamper growth in 2000-01 too.

Corporate score-card

A Business Line analysis of the universe of 950 companies in the 2000-01 first quarter (April-June) reveals that both the topline (total income from operations or sales) and the bottomline (post-tax earnings) show fairly healthy growth. While the topline increased 30 per cent, the sustainable post tax earnings (before extraordinary items) grew 31 per cent over the corresponding previous period.

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As total expenditure growth was higher relative to the growth in sales, the `operating profit margins' -- one of the key profitability parameters -- declined marginally. The operating profits dipped by about 0.4 percentage points to 11.9 per cent.

With only a modest rise in interest cost, the gross profit margins decreased by only 0.2 percentage points this quarter over the same quarter the previous year. Interest cost as a percentage of revenues actually declined, indicating better working capital management in terms of lower debtor cycles and lower inventory-carrying cost this quarter.

Though the depreciation charge has risen in absolute terms in the first quarter, as a percentage of revenues it declined, suggesting that no significant capital investments were made this quarter.

Broad pointers

Business Line examined the first quarter performance of all of the critical sectors to establish the key drivers in India Inc.'s earnings performance and draw pointers for the future. The sectors (and the companies representing them) which hogged the limelight as gainers or losers in the first quarter were:

Software-media-telecom drive growth: Among the top gainers in sales and post-tax earnings were companies from the software-media-telecom triad. The software toppers were Vakrangee Software, Orient Information Technology, VisualSoft, Infosys Technologies and Satyam Computers, while the media companies that saw the highest sales were Jain Studios and Shri Adhikari Brothers. The biggest telecom gainer was Himachal Futuristic.

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A mixed dose: The sales percentage of the majority of pharma companies was locked in the 10-20 bracket, with a few exceptions such as Wyeth Lederle and Sun Pharma. Even in terms of post-tax earnings growth, the MNC and Indian companies presented a mixed picture.

On the one hand, pharma MNCs such as Abbott Labs, Rhone Poulenc, Parke Davis and Wyeth Lederle, and Indian companies such as Morepen Labs and Sun Pharma, recorded above average earnings performance (30-55 per cent growth).

Dr. Reddy's Labs, Novartis, Astra IDL, German Remedies and Orchid Chemicals recorded earnings growth rates in the 10-15 per cent bracket, in line with the average industry growth. In relative terms, the pharma industry has shown buoyant earnings growth this quarter. The second quarter will, however, be the crucial test of sustainability for the industry.

FMCG sparkles: FMCG leaders, such as Cadbury, Nestle, Smithkline Beecham Consumer Healthcare, Britannia, Dabur and Reckitt & Colman, turned in a reasonably inspiring post-tax earnings performance in the April-June quarter of 2000-01. This earnings growth was thanks to softer price trends in raw materials and cost control measures, such as supply-chain efficiencies and productivity improvements, rather than by significant volume growth. For instance, Hindustan Lever recorded a 26 per cent rise in post-tax earnings on a mere 4.6 per cent growth in revenues in April-June.

Second, despite the economic slowdown, the FMCG leaders in each product category maintained volume growth which, by inference, was at the cost of their peers. For Hindustan Lever and Nestle, exports helped prop up volume growth to some extent. Given the relatively sluggish volume growth, it remains to be seen if FMCG stocks can sustain volume growth in the July-September quarter. If they fail, the post-tax earnings of these leaders may decline sharply.

Commodity sectors: The performance of the commodity sector was mixed. While steel, petrochemicals, paper and non-ferrous metals fared well, the cement industry turned in a disappointing performance.

The firming up of steel prices, which started early this year, was sustained in the first quarter. Aided by buoyant volumes and exports, industry majors such as Tata Steel, Steel Authority of India and Jindal Vijaynagar Steel performed well. SAIL's losses fell sharply. But as prices are showing signs of flattening out, and the future hinges on export volumes, the performance of the steel industry in the second and subsequent quarters still remains uncertain.

The petrochemicals, paper and non-ferrous metals sectors were aided by a sharp recovery in prices. While the international prices of petrochemicals and paper are expected to remain firm, helping such players as Reliance and TNPL record good growth rates in the subsequent period, non-ferrous metal prices are expected to remain flat. However, players in the aluminium industry, such as Hindalco (by virtue of its recent acquisition of Indian Aluminium), could use their dominant market position and the comfortable duty differentials to effect price increases in phases.

The cement industry performance proved disappointing as production volumes improved only 3 per cent, and realisations dipped 4 per cent in the first quarter. This affected the performance of such majors as Madras Cements, Larsen and Toubro (cement division) and ACC. The only player to escape was Grasim Industries, with flat growth rates in post-tax earnings.

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Economically sensitive sector disappoints: There were few bright spots in the engineering and automobiles sectors. The former barely showed signs of revival, with Ingersoll Rand, Atlas Copco and Tata Honeywell languishing. Even the engines major, Cummins India, kept itself afloat mainly through its export-led strategy.

The automobiles industry was also in the doldrums, with the LCV/HCV segments recording negative growth rates and the passenger car segment registering a slowdown. The earnings record of LCV/HCV majors, such as Tata Engineering, Ashok Leyland and Mahindra and Mahindra, testify to this decelerated growth.

The refinery segment, though not strictly in this category, was also affected by the sharp rise in crude prices, with the performance of the refinery majors suffering considerably. All the three refining majors -- Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum -- recorded sharp dips in profitability in the first quarter of 2000-01. The standalone refineries, such as Cochin Refineries, which do not have the cushion of marketing margins to supplement the refining margins, were worse hit.